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On the Advantages and Disadvantages of Sole Proprietorships

One common structure for new businesses is the sole proprietorships. The sole proprietorship is the simplest form of doing business, and is an entity that is owned by one person. If your business will have more than one owner (other than your spouse), you will need to consider a partnership, corporation, or limited liability company.

Forming a Sole Proprietorship

The principal advantage of a sole proprietorship is that it is inexpensive and easy to form. In fact, if you are operating a business as a single person, you are already a sole proprietor. That said, you may need to file in your city or county and pay a local fee. If you are using a name for the business other than your last name, you will need to file an assumed name certificate (DBA) in the county where your business is located. If your business does not have a fixed location, such as one which has satellite offices, you will need to file an assumed name certificate in all counties where you do business.

Personal Liability

The main disadvantage of doing business as a sole proprietor is that you are personally liable for the debts of the business. If your business does not earn enough money to pay its bills and debts, your creditors can sue you and can enforce a judgment against your non-exempt assets. Because of this exposure, it is important for you to purchase adequate liability insurance. It is a good idea to work with a knowledgeable insurance agent who will analyze your business and advise you on your insurance needs.

Nonetheless, a sole proprietorship may be a good initial choice for your small start-up business if there is little likelihood you will be sued and you do not need to raise much capital. Later, as your business grows, you can consider forming a corporation or an LLC to provide you with limited liability.

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