The National Directory of Certified Public Accountants

Ask A CPA - Sole Proprietorship - Schedule C

What Are Some Disadvantages Of Selecting To Be A Sole Proprietor Compared To Other Entities?

A sole proprietorship is one of the four basic types of business entities. It is the easiest kind of organization to create but it also has some of the largest drawbacks. A sole proprietorship is not registered with the state as a corporation or limited liability company. Sole proprietors are generally not shielded from liability when it comes to the company's actions. Unlike LLC's or corporations, there is no "corporate veil" shielding the individuals from the responsibilities of the company. Sole proprietorship are not separable for tax purposes. That means the owner and the business is viewed as the same entity by the government and are taxed as a single entity. Also, sole proprietorship generally has the fewest tax breaks and benefits. Business debts under a sole proprietorship are not separable from the owner's personal debts. That means your personal possessions can be sought by creditors if you default on payments or loans. A sole proprietorship is a one person operation. You can not take on partners or others to run it with you, only employees. With no partners and unlimited liability, it can often be difficult for sole proprietorships to get funding. As the only person in control, owners of sole proprietorships can have unlimited demands placed on their time.

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