Risks of Doing Business as a Sole Proprietor

There are many things to consider when starting a business, and something as fundamental as liability protection may take a back seat to seemingly more pressing concerns. It may be tempting for entrepreneurs to take the easy path and simply operate as a sole proprietorship, but doing so carries a number of risks.

When a person operates a business as a sole proprietorship, that person does not form a business entity but instead personally owns all the property used in the business. That person also pays individual income tax on profits and assumes personal liability for any debts incurred in the course of doing business.

Doing business as a sole proprietorship does not require filing formation documents with the government, although some licensing and trade name registration may be necessary in some jurisdictions. Doing business in this manner may be appropriate for some types of businesses that do not carry a risk of major liability. However, liability can come from unexpected sources, and insurance alone may not offer adequate protection. Entrepreneurs should carefully consider potential risks before deciding to do business as a sole proprietor.

Any business that has an office, shop, or other type of premises that is open to customers or the public in general faces a major risk of liability and should avoid doing business as a sole proprietor. Additionally, business owners must consider the potential for liability stemming from contracts with both customers and vendors. Because of the risks involved, it is always wise to at least consider forming a business entity such as a Limited Liability Company and to consult an experienced business attorney before setting up shop.