If you’re running a company, there are a variety of legal structures you can choose from. The simplest type of business, however, is known as a sole proprietorship. If you choose not to register your company or don’t file for incorporation, it’s immediately considered a sole proprietorship. While the simplicity may seem appealing, there are several legal downfalls related to running a sole proprietorship business.
No Protection from Creditors
If you’re a sole proprietor, it means you’re the only owner of your company. Essentially, you and your business are extensions of each other. Unfortunately, this means your debts are also shared as well. If your company can’t afford its debts after incorporation, at least you are personally safe from business creditors.
If you choose to forego incorporation, however, those business creditors can come after your personal assets. Similarly, personal creditors can go after your business assets if you’re a sole proprietor. The simple fact of the matter is that there’s zero creditor protection when it comes to this type of business entity.
In addition to creditors chasing you down over business debts, your liability also extends into tort law. If one of your employees was to blindside a driver in a company vehicle, for instance, the victim could sue you for damages.
Similarly, a professional error, product malfunction, breach of contract and any other type of business tort you can imagine will fall squarely on your shoulders. Since sole proprietorships make the company an extension of you, your personal assets are at risk if the business is sued.
Missing Out on Tax Opportunities
Credit and tort liability aren’t the only problems that sole proprietors run into. As is the case with every other aspect of this legal entity, you’re personally responsible for all business debts. Unfortunately, this holds true during tax time as well.
By incorporating your company, you won’t face any personal taxes from your business. If you don’t take this step, you’ll file any profits and losses directly on your personal income tax forms. Once again, this puts you right in the path of liability with no distinction between you and your company.
The simple fact of the matter is that opting for a sole proprietorship comes with several legal perils that can destroy your personal finances. It might be the simplest business formation, but this is only because it offers no protection. Even if you have to seek legal help to figure out the nuances of incorporation, you’ll at least be protected from torts, creditors and tax liability on a personal level.
More Information and Help
What more information? We’ve created a list of Utah’s business law’s most frequently asked questions that will help you as you’re making business decisions. Review that list here.
Not sure what the best option is for your business? The attorneys at Johnstun Law can help you navigate through starting a business, helping you make the most profitable decisions. Contact us today to get started making your business as successful as it possibly can be.