2 risks associated with operating a sole proprietorship

On Behalf of | Apr 28, 2023 | Business Law

A sole proprietorship is the simplest and most straightforward business entity, and many people find that reality to be appealing. They don’t have to share control over their company with a partner and don’t have to answer to a board of directors. They also don’t have to hire an accountant to handle complicated business tax returns, as they can file their taxes as a self-employed individual.

Especially when someone isn’t sure if they will pursue their business concept full time or how successful it will be, they may feel like simplicity is the best approach. While there is certainly something to be said for straightforward business startup paperwork and tax obligations, those who run a business as a sole proprietorship in California forego certain protections and benefits available to the owners of more complex business structures.

Sole proprietorships expose business owners and entrepreneurs to personal risk. These are the most noteworthy potential hazards that someone is compelled to accept when operating a sole proprietorship.

The possibility of business failure

A significant portion of new businesses will fail, and even companies that have been successful for multiple years can suddenly become insolvent if there is a change in the pricing of crucial supplies or if demand for certain services drops. In a sole proprietorship, the individual who owns the business can sometimes face financial claims from creditors or landlords for the remaining debts owed by the business when it fails.

The risk of a judgment against the business

Maybe someone provides handyman services for local homeowners and has someone blame them for a house fire after they install new outlets at the property. Perhaps there is an issue with a defective product or a worker getting hurt on the job.

Business owners may have to accept liability for their company’s products and services if they don’t have legal separation from the business. They can also sometimes face liability for workplace incidents. Those who create a limited liability company or other more formal business structure can create a layer of protection between themselves and the company in the event of organizational failure or some kind of claim by consumers or workers.

Exploring the benefits of different business structures with the assistance of an experienced legal professional can help entrepreneurs put the right protections in place for their upcoming projects and to address any gaps in their liability protection that may exist at present.


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