Bottom Line
A Sole Proprietorship means you are personally liable for any business actions you take and all of your assets are potentially exposed.
What is a Sole Proprietorship?
A Sole Proprietorship is the term used to describe a business that is not distinct from you as a person. You use your own social security number for banking accounts and tax filings. For all intents and purposes, there is no distinction between you and your business.
Why is this a bad idea?
Let’s say you make a mistake, forget a filing, or damage something belonging to another person or business. In a Sole Proprietorship this means that you are personally liable – and any action that a customer or other party brings against you is in your personal capacity. This means personal assets and even your home can be at risk.
Will this protect my personal finances?
Yes and no. As noted, incorporating or organizing a separate legal entity can help shield you from liability – there are indirect ways lenders, in particular, can gain access to your personal finances – through personal guarantees. Often, lenders won’t extend financing to companies without two-to-three years of tax returns – so the only way to get credit or loans is for you to provide a personal guarantee. This means you are personally on the hook for payments even if your business goes bust. Even if you close your business and even declare business bankruptcy, you are still personally liable for repaying the debt.
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