Disadvantages of Proprietorships
As we’ve seen in the previous list, a sole proprietorship has several advantages. But things are never as good as they seem, right? This type of organization has its downsides too, and here are a few.
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As we’ve seen in the previous list, a sole proprietorship has several advantages. But things are never as good as they seem, right? This type of organization has its downsides too, and here are a few.
- Personal liability
As the owner of the sole proprietorship, you will be personally liable for any debts or taxes of the business or other claims, such as legal damages resulting from a lawsuit. This is one reason many entrepreneurs prefer to use a corporation or LLC (limited liability company) rather than a sole proprietorship. Unlimited personal liability is perhaps the major disadvantage of operating a business as a sole proprietorship.
- Limited tax savings for fringe benefits
A major disadvantage of sole proprietorships is they cannot obtain a number of significant tax benefits regarding group-term life insurance benefits, long-term disability insurance coverage, and medical insurance or medical expense reimbursements. To qualify for favorable tax treatment regarding these fringe benefit plans, you need to incorporate. Since January 1, 2003, a self-employed individual has been allowed to deduct 100 percent of his or her health insurance when computing adjusted gross income. However, the health insurance deduction only reduces your income tax, not the federal self-employment tax.
- Largely eliminates special advantages of corporate retirement plans
While this was formerly an important disadvantage of operating as a sole proprietorship, there are now virtually no differences in the tax treatment of self-employed plans of sole proprietorships and partnerships, as compared with corporate retirement plans.
- Harder to borrow money
Compared to a corporation or LLC, a sole proprietorship lacks any continuity of existence if the proprietor dies. A corporation continues after the deaths of its stockholders. For that reason, banks or other lenders are often more hesitant about lending to sole proprietors than to corporations or other legal entities.
Source: Michael D. Jenkins, an attorney and CPA (www.roninsoft.com). Contact him by email at mdjenk@aol.com.
