Sole proprietorships are the smallest form of business organization, and also the most common in the United States. However, while there are certain advantages (it is easier to set up a sole proprietorship than a limited liability company, for instance), there are a number of big disadvantages, particularly in the long term, that make the sole proprietorship model quite unattractive to business owners.
The main disadvantages to being a sole proprietorship are:
Unlimited liability: Your small business, in the form of a sole proprietorship, is personally liable for all debts and actions of the company. Unlike a corporation or an LLC, your business doesn't exist as a separate legal entity. Therefore, all of your personal wealth and assets are linked to the business. For instance, if you go bankrupt and owe your debtors $100,000, then that money will have to come out of your own wallet even if there is no money left in the business. If you operate in a higher risk business, such as manufacturing or consumables, the cost to benefit ratio is favorable toward a corporate structure.
Sole proprietorships have unlimited liability
A sole proprietor will be responsible for all the costs and debts of their company.
Lack of financial controls: The looser structure of a proprietorship won't require financial statements and maintaining company minutes as a corporation. The lack of accounting controls can result in the owner being lax about financial matters, perhaps falling behind in payments or not getting paid on time. It can be a serious issue if financial controls are not strictly managed.
Difficulty in raising capital: Imagine your business in five years. Will it still be a business of one? Growing your small business will require cash to take advantage of new markets and more opportunities. An unrelated investor has less peace of mind concerning the use and security of his or her investment, and the investment is more difficult to formalize; other types of business entities have more documentation. Outside investors will take your company more serious if you are a corporation.