What Is a Major Drawback of a Sole Proprietorship?

A sole proprietorship is one of the four basic types of business organization. The easiest kind of organization to create, it also has some of the largest drawbacks. A sole proprietorship is not registered with the state as a corporation or limited liability company.

Liability

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.

Taxation

Sole proprietorship are not separable for tax purposes. That means the owner and the business are viewed as the same thing by the government and are taxed as a single entity. Also, sole proprietorship generally have the fewest tax breaks and benefits.

Liability

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.

No Partners

As the name implies, a sole-proprietorship is a one-person operation. You can't take on partners or others to run it with you, only employees.

Funding

With no partners and unlimited liability, it can often be difficult for sole proprietorships to get funding.

Time Demands

As the only person in control, owners of sole proprietorships can have unlimited demands placed on their time.

References

• Sole Proprietorships
• SCORE: The Sole Proprietorship

Resources

• Internal Revenue Service: Sole Proprietorships