Starting a sole proprietorship can be straightforward, but the biggest concern often is personal liability. Here’s why:
- Personal liability risk: You are personally responsible for all business debts and obligations. If the business incurs debt, gets sued, or faces tax issues, your personal assets—home, savings, vehicle—could be at risk because there’s no legal separation between you and the business.
- Financial exposure can be sudden: A single lawsuit or failed cash flow can threaten your personal finances, making it harder to separate personal and business life.
- Difficulty raising capital: Lenders and investors may view sole proprietorships as riskier or less scalable, which can limit growth and access to funding.
- Tax complexity at times: While taxes are simpler in some respects, you still file as an individual and report business income on your personal return. There’s no pass-through entity flexibility, which can affect self-employment taxes and potential deductions.
- Continuity concerns: If you’re not able to run the business (illness, injury, retirement), the business may have to end or undergo significant changes, since there’s no separate entity to transfer or sell easily.
If you want, I can compare sole proprietorship with other structures (LLC, S-corp) and suggest practical steps to mitigate these risks, like insurance needs, separation of assets, and basic record-keeping. Would you like that?