The Scary Realities of Sole Proprietorship

Happy Halloween!

While you might be dodging scary entities like ghosts, zombies, and monsters this week, we thought it’d be a great opportunity to address another less-than-desirable entity in the business world: sole proprietorship.

Sole proprietorship is the simplest form of business ownership. It usually refers to a person who owns the business and is personally responsible for its debts. Here’s the kicker though: it’s not actually a legal entity. And, this is where things can get scary.

Sole proprietorship is very common in small business and for many entrepreneurs when they’re just starting out. However, it does come with some challenges. Let’s break it down:

Trick or Treat Your Self?

When you’re a sole proprietorship, you and your company are essentially one in the same. That means any legal problems that affect your business will also affect you. Any business expenses are your own; and, your income is directly related to your business’ profits.

Money Monsters

Since your assets will essentially be exposed to litigation, raising capital might become an issue with investors becoming hesitant to invest in your company. Same applies to getting a loan from a bank: lenders might worry about the loan defaulting if something happens to the owner.

Enter the Taxman

Sole proprietors might have to make more tax payments per year -- up to four payments. If a sole proprietor falls behind? The IRS might come knocking -- and we’re not talking about to trick or treat. Not to mention the self-employment taxes that are required if business earnings exceed $400.

Life After Death (of the Business)

Things can get tricky in a sole proprietorship, if anything happens to the owner. Business assets can get tied up if the owner dies, decides to retire, or ends up selling the business. If any of these things occur, the assets will remain in the deceased owner’s estate. Adversely, if any transactions occur where the sole proprietorship adds more owners, the sole proprietorship will automatically dissolve.

So, as a business owner what can you do to avoid the pitfalls of sole proprietorship? That’s where we come in. Starting a Delaware LLC or corporation will offer much more protection and growth opportunities for you and your business venture. Although it costs more to set up and involves more paperwork, a Delaware LLC is a much more reliable viable business option. You can run your business knowing that your business assets are protected (and separated from your personal assets), you have much more potential to raise capital, and that transfer of ownership is actually a possibility beyond death (of both the owner and the business).

If you’re currently a sole proprietor looking to open a Delaware LLC, or a new business owner unsure of how to structure their new venture, feel free to browse our site or give us a call!