One kind of business entity that many small businesses start out as is a sole proprietorship. This business structure is the easiest business entity to set up, but it does not offer you the protection that you would get with some other business forms.
If this is your first business, you may want to look into options other than a sole proprietorship, because a sole proprietorship doesn’t protect you against liability. You will be personally liable for all of your business’s losses and debts. If your business is sued or goes bankrupt, your personal property will be at risk.
Taxes are another reason to consider different business structures
A sole proprietorship doesn’t get taxed separately from your personal income. That means that the business’s income is your income. On your taxes, you’ll be able to use Schedule C on Form 1040 to write down your losses or income. Keep in mind that you will be asked to pay self-employment taxes and estimated taxes when you run a business under a sole proprietorship.
Being a sole proprietor isn’t always the right choice
Simply put, it’s not always the right option to stay a sole proprietor. You are disadvantaged in multiple ways when you choose this business structure. You’ll be held personally liable for taxes, debts and business obligations. You may find it hard to get investors or to obtain financing for your business. In the end, you’ll be the one responsible if your business goes south.
Other options are available. It is important to understand all of your options before deciding how you’d like to move forward with your business.