People who run a business alone without setting up a formal business entity operate their business as a sole proprietorship. They shouldn’t.
A sole proprietorship is not a business entity – it is a business operated by a single person without an entity. Cheap, no frills. Sole proprietorships are the default form of business if you do nothing to form your company and you are the only owner. (This is totally different than setting up a formal entity and acting as the only cook and bottle washer – that’s common and often what you have to do to get going.)
Here are 4 reasons why sole proprietorships are always a bad choice.
1. NO LIMITED LIABILITY
First, there is no limited liability in a sole proprietorship. Every act that exposes your business to liability exposes YOU to liability – and your house and kids and retirement fund. Oy.
2. YOU CAN’T GET INVESTORS
It is nearly impossible to get investors, because that would transform the entity into a partnership and the investor would be a partner without limited liability.
3. YOU CAN’T CLOAK YOUR BUSINESS
You can’t use “Inc” or “LLC” or the like in your company name, which may make your business appear newish or amateurish.
4. HIGHER TOP TAX RATES
A sole proprietorship pays its taxes on the return of the individual who owns it. If you have a good year, you may pay higher taxes than you would as an entity, because individual tax rates are higher.
Got any other reasons why sole proprietorships are a bad choice? Got any reasons why you totally disagree with me? If so, please comment!