Taxes Made Simple

The primary downside to operating your business as a sole proprietorship requires little explanation. In essence, the problem is that a sole proprietor is personally liable for all of the debts of the business. This is known as having “unlimited liability.”

To elaborate, if anybody successfully sues your business, they’ll be able to come after your personal assets, not just the money that you have in your business checking account. To be perfectly clear, this means that—if the suit is for enough money—you could end up losing all of your personal savings, your car(s), your home, and anything else you have that might be of value. Everything.

Oh My Goodness That’s Scary! (Right?)

For many people, just reading a description of what exactly it means to have unlimited liability is enough to get them to start Googling “how to form a corporation.” And that’s understandable.

But before you go and spend a substantial amount of time and money forming some other type of business entity, spend a little time thinking about how big of a problem unlimited liability really is for your business.

For instance, do you offer a service, or do you create and sell a product? In either case, imagine the worst-case scenario, and think about how bad it really is.

Let’s say you provide a service. What’s the worst thing that could happen if everything goes wrong with a client? Does the client lose millions and millions of dollars? Does the client need a trip to the hospital? Or, perhaps, is the worst-case scenario simply that the client is out the money that you charged them?

If you create and/or sell a product, do the same type of analysis. If everything goes as terribly wrong as you could possibly imagine, what happens?

If the worst thing that you can think of isn’t really all that bad, then perhaps—despite nearly everything you read online—it isn’t necessary to incorporate or form an LLC.

EXAMPLE: A self-employed author who writes and self-publishes science fiction novels. (I don’t know about you, but I can’t think of too many things that could go wrong for this business owner that would result in significant liability to anybody.)

Simple Summary

• As a sole proprietor you will have “unlimited liability” for any debts of the business. This means that, in the case of a lawsuit, somebody could come after your personal assets, not just business assets.
• Depending upon the nature of your business, it’s at least possible that unlimited liability isn’t that big of a problem.

For More Information, Take a Look at My Related Book.

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A testimonial from a reader on Amazon:

"Quick and easy read. No fluff, just straight to the point and gives you more helpful information that you might imagine. If you are looking to get the bottom line information you need to start your business right then this book is a must have." R.L. Muhammad

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