Sole Proprietorship & Partnership
Most self-employed people operate as a sole proprietorship. As a sole proprietor, the individual starts, manages, and provides the capital for the business. He/She also gets to keep all of the net profit and pay the taxes for the business. On the other hand, the sole proprietor assumes total liability for the business. If the business is sued or fails, the sole proprietor risks losing his/her personal assets.
Sometimes two or more people get together and form a partnership. Together, they start, manage, and provide capital for the business. What most partners do not realize is that all partners are personally liable to an unlimited degree for the activities of all the other partners.
If structured properly, a corporation limits the liability of the officers and stockholders (among other advantages) and offers a layer of protection against lawsuits.
Disadvantages of Proprietorships and Partnerships
There are numerous disadvantages to not incorporating. In simply functioning as a sole proprietor or a partnership, you endure:
- Unlimited personal liability — You are personally liable for all debts of the business.
- In a partnership, each member can bind the other so that one partner can cause the others to be personally liable. Failure of the business can ruin the owner(s) financially.
- All profits are personally taxable to the owners.
- Owners have fewer tax advantages or tax deductible plans than are available to corporations.
- Most partnership agreements restrict in some way how a partner can dispose of his share of the business.
As can be seen from this list, running a business without incorporating is risky business!