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Why you shouldn’t own a business as a sole proprietorship

On Behalf of | Jan 24, 2022 | business formation & planning

There are numerous business forms that people use, and each of these structures offers unique benefits and certain drawbacks. A sole proprietorship is a popular choice among those starting their first-ever business or intending to run a small business in addition to maintaining their primary career.

A sole proprietorship won’t involve a board of directors overseeing you or a partner micromanaging how you run the business. However, there is a big trade-off for the ease of starting a sole proprietorship and the control that you retain over the company.

Specifically, starting a sole proprietorship leaves you at financial risk for any claims made against the business.

What might go wrong with the company?

A significant portion of businesses fail within the first few years of opening, and even long-term businesses may go under if they face claims by customers or former employees in civil court. There are countless possible financial issues that could arise with a business that could hurt the owner.

They may accrue so much debt that they can no longer continue operating and have to liquidate those debts while closing the company. They might unintentionally break employment laws and face a lawsuit from all of their former staff members that forces the liquidation of all the company’s assets. Consumers could bring a lawsuit against the company for fraudulent advertising or defective products.

In a scenario involving bankruptcy or civil litigation, the owner of a sole proprietorship has unlimited liability. The plaintiff in a claim against the business can hold the owner of a sole proprietorship personally responsible for anything that the courts award them.

Your assets and future income are at risk

If other people or another business brings a successful lawsuit against your company or if creditors bring a claim against the business while you tried to close it down, you could be personally responsible for the money the company owes. Your assets, including your home, could be at risk. Your future income could also be in danger, as creditors can garnish your wages to force a faster repayment process.

Although it takes more work to start other, more complex businesses, choosing a structure other than sole proprietorship will help you best protect yourself when starting a new company.