{"id":4897,"date":"2016-04-04T10:47:49","date_gmt":"2016-04-04T15:47:49","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/what-are-the-disadvantages-of-a-sole-proprietorship.html"},"modified":"2025-11-01T11:17:00","modified_gmt":"2025-11-01T16:17:00","slug":"what-are-the-disadvantages-of-a-sole-proprietorship","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/what-are-the-disadvantages-of-a-sole-proprietorship.html","title":{"rendered":"What Are the Disadvantages of a Sole Proprietorship?"},"content":{"rendered":"\n
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What Are the Disadvantages of a Sole Proprietorship?<\/h1>\n\n
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\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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Key Takeaways<\/h2>\n

A sole proprietorship<\/span> is an unincorporated business<\/span> owned by one person. Because it is not a separate <\/span>legal entity<\/span> from the owner, the owner has unlimited <\/span>personal liability<\/span>, has to pay self-employment taxes<\/span>, and may have issues with business continuity and getting money for the business.<\/p>\n\n <\/div>\n <\/div>\n<\/div>\n\n\n

Sole proprietorships<\/span> are a popular form of business<\/span> for many entrepreneurs<\/span>.\u00a0Sole proprietorships<\/span><\/a>\u00a0are businesses where a single person owns and runs a company with no separate legal existence. This is because there are advantages of a <\/span>sole proprietorship<\/span>, such as easy decision-making<\/span>.<\/p>\n

They give their owners complete control<\/span> over the entire business. Sole proprietorships<\/span> are quick and easy to set up, often\u00a0need little start-up<\/span> cash, and accounting is simple.<\/p>\n

There is also no need for a separate business<\/span> organization. The owner of a <\/span>sole proprietorship<\/span> can simply use their own name<\/span> or file a trade name<\/span>, often called \u201cdoing business as” (DBA<\/span>), to start their business. Many companies start as sole proprietorships<\/span>. Some stick with that business structure<\/span> until they close.<\/p>\n

However, sole proprietorships<\/span> have many disadvantages as well. Every new <\/span>business<\/span> owner<\/span> planning on operating as a sole proprietorship<\/span> should be aware of the potential legal costs and issues. Let\u2019s dive into the downsides of running a sole proprietorship<\/span> business<\/span>.<\/p>\n

Need help with business formation? Our trusted partner LegalZoom makes it easy\u2014packages start at $0 + state filing fees.<\/a><\/b><\/em><\/p>\n

Main Disadvantages of <\/span>Sole Proprietorships<\/span><\/h2>\n

Personal Assets<\/span> Are At Risk<\/h3>\n

One of the big disadvantages of a <\/span>sole proprietorship<\/span> is that there is no legal distinction<\/span> between the owner and the business. The\u00a0sole proprietorship<\/span><\/a>\u00a0is a business in its simplest form and has few formal business requirements. There is no separation between business assets and personal assets<\/span>. This means that if anyone sues the business for any reason, the business owner<\/span>\u2019s cash, car, or home is on the line.<\/p>\n

This means there is unlimited liability for the entrepreneur<\/span>. If the business owes money or gets sued, the owner\u2019s <\/span>personal assets<\/span>, like their bank account<\/span> or home, are at risk. This lack of liability protection<\/span> can be scary for small <\/span>business<\/span> owners<\/span>.\u00a0<\/p>\n

This is different from both the LLC (limited liability company<\/span><\/a>) and\u00a0corporate business structures<\/span><\/a>. In these structures, there are strict separations between business assets and personal assets<\/span>. When someone sues an LLC or corporation, the most that person can get is its business assets. This protects the business owners<\/span>.<\/p>\n

Most sole proprietors<\/span> buy\u00a0business insurance<\/span><\/a>\u00a0in case they are sued. While insurance can help by providing money to settle lawsuits, it will not always offer complete protection. Many policies only cover certain kinds of cases, such as personal injury suits, if someone slips and falls on your property.\u00a0<\/p>\n

Any other claim, like a collection action from one of your vendors, is not covered by insurance. Additionally, the money the policy provides may not be enough to cover your damages. This can leave your opponents free to go after your personal assets<\/span>.<\/p>\n

Self-Employment Taxes<\/span><\/h3>\n

Another downside is the tax situation. When filing taxes, the\u00a0Internal Revenue Service<\/a>\u00a0(IRS<\/span>) looks at sole proprietorship<\/span> business<\/span> income<\/span> as the owner\u2019s personal income. This means using a\u00a0Schedule C<\/span> form<\/a>\u00a0for personal <\/span>tax returns<\/span>. Sole proprietors<\/span> also face self-employment taxes<\/span>. These taxes cover things like Social Security<\/span> and Medicare.\u00a0<\/p>\n

While there are tax advantages to this form of business<\/span>, navigating the IRS<\/span> rules alone can be tricky. Many entrepreneurs<\/span> find they need professional help to keep up with income tax and other rules.<\/p>\n

The Business Dies With Its Owner<\/h3>\n

In a sole proprietorship<\/span>, there\u2019s no legal entity<\/span> separate from the owner. So\u00a0when the owner of a <\/span>sole proprietorship<\/span> passes away, the business dies as well. Unlike a C corporation<\/span> or other business organization types, a sole proprietorship<\/span> doesn\u2019t live on without its founder<\/a>. This can be a tough pill to swallow, especially for freelancers<\/span> and others who\u2019ve put their heart and soul into their work.<\/p>\n

Courts do not see any difference between a sole proprietorship<\/span> and its owner. When the owner passes away, the business ends unless the owner makes a prudent\u00a0estate plan<\/a>\u00a0that allows the company to continue. In a corporation, the business is said to have a\u00a0perpetual existence.<\/a>\u00a0This means that it will continue until its owners, directors, and shareholders decide to end it.<\/p>\n

Sole Proprietorships<\/span> Have Fewer Ways To Raise Money<\/h3>\n

Raising capital can be challenging for sole proprietors<\/span>. In contrast, corporations<\/a> 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. Selling shares gives people a piece of the company in exchange for the money they invest. However, a sole proprietorship<\/span> has no shareholders. It cannot sell shares without changing its business structure<\/span>.<\/p>\n

Sole proprietorships<\/span> may borrow money just like other business structures<\/span>. However, because there is no separation between business and personal assets<\/span>, many sole proprietors<\/span> need to use their personal assets<\/span> as collateral for the business loan. As a result, banks may be hesitant to give loans. A sole proprietor<\/span> can even use their home as collateral. If the business fails and the owner does not have enough money to pay the loan, the lender<\/span> can take away the owner\u2019s <\/span>personal assets<\/span> to get that money back.<\/p>\n

Additionally, there\u2019s no separate <\/span>business<\/span> entity<\/span>. It\u2019s hard for a sole proprietorship<\/span> to bring in partners or investors. The bottom line is that the owner might need to rely on their own savings or get creative to fund their business plan. See FindLaw\u2019s small business<\/span> section to help you decide\u00a0which legal structure is best<\/a>\u00a0for you. Also, check out this helpful\u00a0checklist<\/a>\u00a0for setting up a sole proprietorship<\/span>.<\/p>\n

Get Legal Help Setting up Your Sole Proprietorship<\/span><\/h2>\n

Although sole proprietorships<\/span> are by far the easiest type of <\/span>business<\/span> entity<\/span> to set up, they also subject the owners to personal liability<\/span> for business debts<\/span>. If you have any questions about the legal implications of a sole proprietorship<\/span>, contact a local\u00a0small business<\/span> attorney<\/a>\u00a0today.<\/p>\n\n\n

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