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Legal Risks of Sole Proprietorships
It can be tempting and even appropriate for certain types of businesses to operate as a sole proprietorship. After all, if you have a one-person team and a "simple" business with low liability potential, such as a photography, freelance writing, or bookkeeping business, the ease of formation, limited paperwork, and relatively low expense of running your business as a sole proprietorship might be a draw.
Yet there are significant legal risks inherent in sole proprietorships that make this business structure somewhat less appealing. The best way to find out which business structure is right for you, and whether it is a sole proprietorship after all, is to discuss the pros and cons with an experienced Fort Lauderdale, FL business law attorney.
What is a Sole Proprietorship?
A sole proprietorship is a business that is unincorporated. It is operated by one person and there is no legal difference between the business and the owner.
What Are The Legal Risks of a Sole Proprietorship?
Unlimited Personal Liability
By far the biggest legal risk of a sole proprietorship is that the business and the individual are not considered separate legal entities. That means that you can be liable for the debts and obligations your business incurs, even if you operate under another name. With considerable potential legal exposure from employees, tax authorities, and collectors as your business grows, having personal liability for your business can be risky.
Difficulty Raising Financing
Whether you are seeking investment capital or a business line of credit from a financial institution, it will be harder to raise money to run and grow your business as a sole proprietor. First, the significant legal risks faced by a sole proprietor cause investors and lenders to view investment in such a venture as less appealing. Second, sole proprietorships do not need to file or draft any formal incorporation documents to operate. While this can make it easier for someone just starting out, lenders and investors like to see paperwork detailing business operations.
Tax Disadvantages
Although sole proprietors can make certain tax deductions, they may be subject to higher federal taxes, such as self-employment tax, in addition to personal income tax.
Contact a Fort Lauderdale, FL Business Law Attorney
The decision of how to structure your business is an important one that requires an understanding of the ramifications of operating as a certain type of business. An experienced Broward County, FL business law attorney can advise you about the best business structure for your business. At The Elliot Legal Group, P.A. our attorney helps individuals and companies choose the ideal operating structure. Call our offices at 754-332-2101 for a consultation today.
