Sole Proprietorships
Print this article
Font Size
Advantages & Disadvantages of Sole Proprietorships
View ArticleView Article Comments
There are both pros and cons to operating as a sole proprietor. Here’s a brief overview of some of the advantages and disadvantages of operating as a sole proprietor:


  • Easy to form
  • Fairly easy to maintain, i.e. hardly any business formalities
    • But you’ll still have to keep sufficient tax records
  • Fairly simple tax structure - You’ll be taxed at your personal income tax rate
  • Easy to dissolve, i.e. terminate


  • Personal liability
    • This is a BIG drawback because you could lose more than just all of your business assets – you could even lose your personal assets!
  • Often difficult to raise revenue for the business because lenders don’t generally like dealing with sole proprietors (because of the liability issues)
    • So, sole proprietors are often limited to using funds from their personal savings and assets
  • False sense of security if nothing goes wrong for a long time.
    • It often only takes 1 lawsuit to ruin a sole proprietor with any protections.
  • No opportunity for other individuals to take an ownership interest in your business.
    • This may keep some top-level investors away from working with you.
  • If you live in a community property state (see some examples listed below) your spouse may automatically own a 1/2 interest in your sole proprietorship even though you have full control over the business. But you’ll have to check with your particular state’s laws, as this rule may not apply to your particular state.
    • Upon last check, community property states include:
      • Arizona
      • California
      • Idaho
      • Louisiana
      • Nevada
      • New Mexico
      • Texas
      • Washington
      • Wisconsin
NOTE: You can often purchase liability insurance, such as business liability insurance (or professional liability insurance if you’re a professional like a lawyer or accountant) which will limit what you’d have to pay on certain claims. However, because it’s generally fairly easy to set up an entity like an LLC to limit your liability, it’s often to your benefit to avoid operating as a sole proprietor and purchase liability insurance.

Next, we’ll take a brief look at some business formalities you’ll still likely have to deal with as a sole proprietor.

Related Legal Articles

Related Legal Words