Is Unlimited Liability a Major Drawback of Sole Proprietorships?
The sole proprietorship is one of four major business organization models in the United States along with partnerships, corporations and limited liability companies. Although it is the simplest and most inexpensive business structure to start, it does come with drawbacks, one major one being the lack of protection it provides owners who are sued in court or filing for bankruptcy.
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Opening Sole Proprietorships
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Consultants, freelance writers and photographers and lawn mowing and landscaping businesses are considered sole proprietorships. This organizational structure is easy for individuals to open and operate. In fact, it is the most common business structure in the United States, according to the Internal Revenue Service (IRS). Sole proprietorships do not have shareholders or board members overseeing operations, and can be operated with one owner.
Paperwork and Fees
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It requires less cost and paperwork to open a sole proprietorship than for other business structures. In some cases, individuals only need to register their business names with their county clerks, which require small fees. For example, it costs $14 to register business names in Mecklenburg County, N.C. However, if businesses need storefronts and other non-residential structures, sole proprietors have to meet city and county ordinances and obtain the required permits.
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Taxation
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The simplicity of operating sole proprietorships also extends to filing business taxes. Business owners report their profits and losses on their individual tax forms. Sole proprietorships do not have special tax rates as do corporations; instead owners pay income and self-employment taxes, the latter covering Social Security and Medicare, throughout the year.
Unlimited Liability
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Unlike corporations, sole proprietors and their businesses are not treated separately by the IRS or the law. This means business owners are personally liable for company expenses and liabilities. If sole proprietors are sued by customers or are filing bankruptcies, their personal assets, such as cars and homes, can be seized to cover damages and debts.
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References
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