Disadvantages of Sole Proprietorship
The biggest disadvantage is that this business structure comes with no protection for the business’s owner. If you or your employee incur a lot of business debt, creditors can go after your personal assets to collect.
A sole proprietor is individually liable for the debts of their business. A business creditor who sues successfully for nonpayment may be awarded the proprietor’s personal assets. In a worst-case scenario, he could end up losing everything he owns.
When an individual elects to run their business as a sole proprietorship, they are personally taking on the business’s legal risks. For example, if a customer is injured, a sole proprietor could be personally sued.
Legal and Financial Risks
- Unlimited liability for debts as there’s no legal distinction between private and business assets.
- Difficulty in raising capital.
A single proprietorship does not establish a separate legal entity from the owner. As a result, the entity’s owner is entirely responsible for all obligations the company may incur.
Tax Implications
Sole proprietorship taxation is straightforward. Because a single proprietorship cannot be distinguished from its owner, single proprietorship taxation is straightforward.
The two biggest disadvantages of a sole proprietorship are unlimited liability and difficulty raising capital.
Other disadvantages include all responsibility for decisions falls on the owner alone, which can be time-consuming.
Sole proprietorship taxation is straightforward since there’s no legal separation between owner and business. However, the owner must pay personal income tax on all business profits.
Establishing a sole proprietorship is easy and inexpensive, but it comes with significant financial risk for the owner.
Conclusion
The primary difference from corporations is that courts do not recognize any difference between a sole proprietorship and its owner. When the owner passes away, the business ends. Creditors can make claims against the estate for debts.
A major disadvantage is the risk of personal assets being at risk due to unlimited liability, which is different from LLC and corporate structures.