Advantages and Disadvantages of Sole Proprietorships

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What Is a Sole Proprietorship?

A sole proprietorship is a simple type of business structure that is owned and operated by the same person. It does not involve many of the complex filing requirements associated with other types of business structures such as corporations. Sole proprietorships allow persons to report business income and expenses on their individual tax returns.

Sole proprietorships are attractive to small investors because they are relatively easy to start up. Also, the owner is entitled to all the profit that the sole proprietorship collects. On the other hand, sole proprietorships can be risky because there is no separation between the owner and the business. 

In other words, the owner remains personally liable for any losses or debts that the sole proprietorship incurs. They can also be held legally responsible for violations committed by the business or its employees. A sole proprietorship can best be summed up by the phrase, "You are the business." 

What Are Some of the Advantages of a Sole Proprietorship?

There are many reasons why a person would choose to start their business up using a sole proprietorship structure. Some of the main advantages of sole proprietorships include:

What Are the Disadvantages of Sole Proprietorships?

Forming a sole proprietorship does involve some risks, mainly to the owner of the business, as legally speaking they are not treated separately from the business. Some disadvantages of sole proprietorships are:

So, while sole proprietorships do not necessarily create more liabilities, they do expose the business owner to a risk of being sued. Lawsuits can be filed against the business owner for legal violations, as well as to collect any outstanding debts.

Do I Need a Lawyer to Start a Sole Proprietorship?

If you plan on starting a sole proprietorship, you should be fully aware of the various pros and cons that are involved in such a business endeavor. It would be a wise decision to consult with a business lawyer before you file for sole proprietorship. Business laws vary from state to state, and a business attorney can help explain the various laws to you. Also, your lawyer can help you calculate the risks involved and help determine whether a sole proprietorship is the right business structure for you.

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Last Modified: 06-18-2014 12:15 PM PDT

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