If you wish to start your own business, you have many potential business structures to choose from. The most basic of these is the sole proprietorship, which is typically owned and operated by one individual and remains unincorporated.
There are potential benefits to starting a sole proprietorship. You are not beholden to shareholders or business partners, and you can usually start up a sole proprietorship with a minimum of paperwork. However, running a sole proprietorship also involves some significant risks.
- Tax trouble
As a sole proprietor, you report business profits on your personal income taxes. The law obliges you to pay quarterly self-employment taxes to cover your Medicare and Social Security tax obligations. Trouble with the IRS, including penalties and tax debt, may result from tax mismanagement.
- Personal liability
When it comes to liability for business debts, the law makes no distinction between you and your business. Therefore, if you owe money to business creditors, they can legally go after your personal assets.
- Health insurance costs
Becoming a sole proprietor means that you no longer have an employer to provide you with health insurance. If you lack insurance and experience a serious injury or major illness, you could wind up with big medical bills. At the same time, purchasing an individual health insurance policy may be beyond your means as a sole proprietor.
Banks may be reluctant to lend you capital to sustain your business. This is especially true if you own a sole proprietorship that is not doing well. The bank may have concerns about your ability to pay back the loan.
If you want to run your business by yourself, a sole proprietorship is not the only business structure available to you. Fortunately, if you want to reorganize an established business to eliminate some of these risks, it is usually a relatively simple matter to convert a sole proprietorship to a different structure.