The sole proprietorship is a popular business structure because it is simple and inexpensive. However, this simplicity also can create major problems for your business. Before operating your company as a sole proprietorship, you should be aware of these problems so they don't catch you off guard.
The sole proprietorship is not a separate business entity. This means that there is no legal separation between you and your company. If you business owes someone money, you as an individual also owe that money. Creditors can go after your personal assets to pay off your sole proprietorship's debts. If someone sues your company and wins a judgment, he also has the legal right to go after your personal assets. You need to be very careful when running a sole proprietorship, because you are personally liable for anything your business does.
A sole proprietorship can only have one owner. You can hire employees for your business, but you can't make anyone else a partial owner. This makes it difficult to expand your business. You can't raise capital by selling off part of your company to another owner. In addition, banks are more reluctant to give loans to sole proprietorships, because they are less-established companies. Businesses that have taken the time and money to set up a more formal business structure seem more serious and established, so it is easier for them to get credit.
When you run a sole proprietorship, you are running it on your own. This is great at the beginning, because you get to make all the major business decisions yourself. However, this can be a problem when you start running into situations that are outside your expertise. In addition, there is only so much you can do per day on your own. By limiting the number of owners, the sole proprietorship limits what your business can do.
Only you can ever be the owner of your sole proprietorship. You can't sell or give your sole proprietorship to another person. If you die, the sole proprietorship dies with you. If you want to transfer your company to someone else, he will need to go through the effort of setting up his own business. Another problem with transferring your sole proprietorship is that it was run by you as an individual. You're the one who learned to operate the company and deal with your customers. When someone else takes over your company, he may not know what to do and could struggle.