What is a sole proprietorship?
Getting ready to start a Colorado Business? One type of entity that you could select is a sole proprietorship. The sole proprietorship is the simplest of the business entities. It requires no filings with the state. The owner is a sole owner and keeps all of the profits of the business. The owner can come and go from the business as he or she pleases.
There are disadvantages, however, to a sole proprietorship. The biggest disadvantage is that the owner of the sole proprietorship can be sued personally for any harm done. The sole proprietor essentially faces unlimited legal exposure. Insurance and limits to liability in contracts can help to limit the exposure. This entity is not a desirable entity for a business that may at some point have a lot of assets. Furthermore, for businesses that may need capital, you are limited with this entity in how you can obtain that. Since you aren’t incorporated and don’t have capital shares, you cannot sell stock. You are in essence largely limited to loans unless you have a wonderful benefactor who wants to gift you money.
Additionally, a sole proprietorship is limited in its governance. Since the sole proprietorship is owned and run by only one person, no one else who may come along has authority with regards to the business. Thus, only the sole proprietor, and no employees or contractors hired by the sole proprietor can bind the company. The sole proprietor is personally responsible for all debts and liabilities. Creditors would likely look towards the sole proprietor’s personal assets in making loans or extending credit.
The best businesses for sole proprietorships would be low risk consulting businesses that require little capital to operate and have few or no assets. These businesses would be putting little of the personal assets at risk and likely could cover much of any exposure through insurance products.