9 Disadvantages of Sole Proprietorships (Important in 2020!)

Disadvantages of Sole Proprietorship

Some entrepreneurs dream of creating a huge company, employing hundreds.

Others would rather be a “one-person show” as a sole proprietor.

A sole proprietorship is owned and run by one individual who receives all profits. It has the benefit of being relatively easy and inexpensive to establish.

Of course, that only tells part of the story. There are several disadvantages to sole proprietorship to be aware of and guard against as well.

My name is Sam Mollaei, and as a Business Lawyers for Entrepreneurs, I can help you decide what type of business organization – including sole proprietorship – might be right for you.

And of course, if you have any questions about your unique situation, feel free to email me.

By the end of this post, you’ll know what the disadvantages of sole proprietorship are so you can make an informed decision as to whether this business structure is right for you.


1. Your Liability Is Unlimited

The most serious disadvantage of being a sole proprietor is unlimited exposure to liabilities and lawsuits.

Types of Companies

Types of Companies

There is a wealth of decisions that go into forming a business in the United States. Arguably one of the most crucial in relation to taxation is the legal structure of your new business.

In addition to taxes, this decision plays a role in how much paperwork you end up dealing with and your ow n personal liability in the company. It even factors into how you can raise money on your company’s behalf.

The most well-known legal structures for a business include sole proprietorship, partnership, corporation, S corporation, and LLC. Limited liability partnership (LLP) is a newer development in the business world.

Fortunately, you do have the option of kicking off your business as a sole proprietorship and reorganizing your structure if you decide to take on partners. So, it isn’t set in stone.

Just make sure you notify the IRS if you make changes in the structure of your business.

Whether this is your first business venture, or you have rode this rodeo before, I highly recommend reaching out to an experienced business lawyer such as myself at sam@mollaeilaw.com.