3 Big Downsides to a Sole Proprietorship

Orange County business attorneys should be consulted when you are starting a company so you can make a fully informed choice about what business entity is best for you. There are different ways to structure a business and your choice of business entity can have a profound impact on the long-term success of the company and on your own financial future. 

Brown & Charbonneau, LLP can help you to make the right choice. Our legal team has provided guidance to companies of all sizes as they make decisions on how best to organize their enterprise. We can assist you in evaluating your choices, from sole proprietorship to partnership to LLC to corporations, and we can explain pros and cons of each different business structure.

You should talk with an experienced attorney as soon as you can when you begin operating a business, because if you do not make a choice, you will typically operate as a sole proprietorship. Operating as a sole proprietor has major disadvantages that could put you and your business in jeopardy.

3 Big Downsides to Sole Proprietorship

There are many disadvantages of operating as a sole proprietor, but three of the biggest downsides include:

• Higher personal liability risk: When you own your business as a sole proprietor, there is no separation at all between you and your company in the eyes of the law. You would be considered the same legal entity in cases of judgements against your business. When your company goes into debt, this is just the same as you having personal debt. This could put all of your personal assets at significant risk. Your company also cannot go bankrupt unless you personally do, if you operate as a sole proprietorship. With other kinds of business structures, you could limit your losses to actual investments and protect your personal wealth.
• Reduced flexibility for taxation purposes: All of your profits and losses have to be declared on a personal return if you operate as a sole proprietorship, and your profits will typically be taxed as ordinary wage income. You have much more tax flexibility if you operate as a different type of business entity, such as a C-corp or an S-corp.
• Difficulty transferring ownership: When you are a sole proprietor, the business success is often closely intertwined with your personal involvement in the company. Selling the business and transferring ownership can be difficult or impossible. When you pass away, there may be high estate tax assessed on the business assets as you transfer it on to new owners. It is much easier to transfer an interest in an LLC or shares of a corporation, in most cases, than to transfer ownership of a sole proprietorship. As a result, other business entities can make it easier for your company to carry on after you are gone.

Brown & Charbonneau, LLP can also help you to understand other pros and cons of sole proprietorship based on the specific type of business you are operating and your goals for the company.

Alternatives to Sole Proprietorship

There are many alternatives to sole proprietorship if you would prefer not to cope with these disadvantages. However, the other types of business entities will all require you to do more paperwork and will typically have higher startup and ongoing cost.

Our legal team can provide you with assistance in evaluating cost and complexity of C-corporations, S-corporations, LLCs and other entities that you could form in the state of California. We can guide you through obtaining the right forms and filing them with the California Secretary of State, and can help you to take care of any paperwork that the IRS requires of you.

We aim to make the process of forming a business entity simple, so let our Orange County business lawyers provide you with help as you get your company off the ground and start to build a successful business.

Getting Help from Orange County business attorneys

Brown & Charbonneau, LLP can provide the guidance that you need to decide if you should operate as a sole proprietor or if another type of business structure is best for you. Our legal team can also help you to follow the formal process of incorporating, filing LLC paperwork, or otherwise taking the necessary steps to create the business entity of your choosing. To find out more about how Orange County business attorneys can assist you in making smart choices for your organization, give us a call at (866)237-8129 or contact us online today to talk with an experinced member of our legal team.