A person who starts a business has to make a decision about what type of business structure they’re going to use. The possibilities depend on a variety of factors. A sole proprietorship is one of these; however, this option comes with some very serious risks that must be considered before anyone opts to use it.
One of the greatest risks is that there isn’t a division between the company and the owner’s personal assets. This places the person’s assets at risk if there is ever a problem with the business. For this reason, it shouldn’t be considered for anything other than a company with a very low risk of something happening. Even when the risk is low, this is an option that might be best bypassed in favor of another entity.
Some people appreciate the simplicity of the sole proprietorship because there isn’t a lot of extra work associated with it. Instead, the owner just registers the name and obtains any applicable licenses to operate. The owner is the business, so they sign their name on all contracts and legal documents. Typically, payments to the business will be made to the owner instead of the business name. All of this puts the duty to comply with the contracts on the owner instead of the business, which presents a serious personal liability if there are ever problems.
Another area where a sole proprietorship is usually easier is taxes, but this comes at the risk of issues with the personal income taxes if there are any issues with the business. In this structure, the business’ taxes are filed on the owner’s individual tax return. The person simply files a Schedule C and a Schedule SE with their taxes.
In some cases, a business will start out as a sole proprietorship, but the owner may find it necessary to move the company to another business structure as it grows — particularly once it expands operations. This can be rather complex, so they need to work with someone who is familiar with business formation and who can advise them about their options.