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What are the Disadvantages of a Sole Proprietorship?
Many businesses get their start as sole proprietorships, and some even stay with that structure until the end of the business. Sole proprietorships have many advantages: they are quick and easy to set up , they do not require large amounts
of money, and accounting is simple. However, sole proprietorships have many disadvantages as well.
A Sole Proprietor’s Personal Assets are Her Business Assets
The biggest disadvantage of a sole proprietorship is that there is no separation between business assets and personal
assets. This means that if anyone sues the business for any reason, they can take away the business owner’s cash, car,
or even their home. In a cor porate business structure, there is strict separation between business assets and personal
assets, so that when someone sues the business, they most that person can get are the business assets, which protects
the business owners.
Most businesses buy insurance in case they are sued. While insurance can help by providing money to settle law suits, it
will not always provide full protection. Many policies only cover cer tain kinds of lawsuits, such as personal injury suits, in
case someone slips and falls on your property. Any other suit, like a collection action from one of your vendors, leaves you
on your own. Additionally, the money the policy provides may not be enough to cover your damages, which leaves your
opponents free to go after your personal assets.
The Business Dies With Its Owner
Cour ts do not see any difference between a sole proprietorship and its owner. So when the owner passes away, the business ends as well unless the owner made a prudent estate plan which allowed the business to continue.
In a corporation, the business is said to have " per petual existence ," which means that the business will continue until its
owners, directors, and shareholders decide to end it.
Sole Proprietorships Have Fewer Ways to Raise Money
Corporations have many ways to raise money to invest in the business. One of the easiest ways for a corporation to raise
money is to sell more shares -- give people partial ownership of the company in exchange for money that can then be
used to grow the business. However, a sole proprietorship has no shareholders and cannot sell ownership in the company
without changing its business structure.
Sole proprietorships may borrow money just like other business structures. However, because there is no separation
between business and personal assets, many sole proprietors need to use their personal assets as collateral of the loan.
Some people even use their home as collateral. This means that if the business fails, and the owner does not have
enough money to pay the loan, the lender can take away the owner’s personal assets to get their money back.
See FindLaw’s small business section to help you decide which business structure is best for you, as well as a useful
checklist for setting up a small proprietorship.
The FindLaw Guide to Online Fraud and Identity Theft
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