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Why sole proprietor may not be your best choice for business ownership

by | Jun 15, 2021 | Business Practice

People looking to go into business for themselves often go with the easiest option for launching their operation instead of the one that best protects their interests. More specifically, business owners launch as a sole proprietorship instead of as a limited liability company (LLC) or some other corporate entity that may afford them some valuable benefits.

While there’s no incorporation or formation process for a sole proprietorship as there is for entities, this choice comes with some downsides. You’ll want to familiarize yourself with the pros and cons of operating your business as a sole proprietorship compared to other types of business structures before committing to a particular choice.

Liability concerns

Entities like corporations and LLCs offer built-in liability protection and shield a business owner’s personal assets from potential creditors. Plaintiffs can come after your assets when they discover that you’re operating as a sole proprietorship due to the relative ease with which they can do so.

How you handle taxes

Sole proprietorships do work similarly to LLCs in some ways. For example, they allow your business income and expenses to be reported on your personal tax returns. Tax officials tend to more closely scrutinize a sole proprietorship’s taxes than they do with entities’ separate tax returns, though. In fact, a sole proprietorship’s taxes are audited five times more than other types of business tax returns.

How long they last and transferability

Sole proprietorships only last as long as their owner does, whereas you can pass ownership of an LLC to others allowing it to remain in operation beyond your own life.

Building credit

Sole proprietors can only build credit in their own individual capacity. LLC owners can build their own credit and that of the business, expanding how much money they have to work with to grow their operations. With certain business debt of an LLC or other entity, your individual credit score is not affected as it would be for your debt as a proprietor.

It can feel daunting trying to weigh all the pros and cons associated with different business structures, it helps to learn more about the different business options that are available.