Sole Proprietorship Disadvantages
As small businesspeople (or, more flatteringly, people who manage small businesses) most of us fall into the legal category of a sole proprietor. And, for most of us, the sole proprietorship is the easiest and most advantageous structure for our businesses to be run under. After all, we’re not generating the income or taking the risks that would cause us to structure our businesses as LLCs or corporations.
However, as our businesses grow and the revenue grows to a more significant size — not to mention the Intellectual Property (IP) being amassed, it becomes increasingly important to be aware of the two major drawbacks of the sole proprietorship.
First of all, as the sole proprietor, there is no buffer between you and any liability you business might incur. Your home, car, personal savings, and other property could be taken away to pay a court judgment. Granted, the chances that your webcomic would fall into such a situation might be fairly slim, but it’s a part of the sole proprietorship that you need to be aware of.
Here’s a great example. CPSIA was passed a year or two back. It purports to protect children from poorly manufactured goods. However, the rules — and the application of those rules — seem to be murky at best (and in a state of flux at worst). I’ll freely admit, I’m very unclear on the full ramifications of CPSIA. However, if you are manufacturing plush dolls and shirk CPSIA, you could conceivably find yourself in some pretty hot water if someone decided their child was harmed by your non-CPSIA-compliant product. And as a sole proprietor, you would be held personally responsible in that action.
Since the sole proprietor ship is, essentially you — and you are the sole proprietorship — both of you die at the same time. When you cease to exist, so does the sole proprietorship. Unless you name an executor in your will — and give that person authorization to handle your business duties, your business might have to be liquidated in order for your family to see any value from it. Furthermore, your family might not be able to access the money in your business bank account until the estate is completely settled.
You can address some of these problems by writing a will and authorizing specific people in the handling of your sole proprietorship. For that, I would strongly suggest talking to a lawyer. And when you do, be sure to discuss any possibilities for handling both of the valuable commodities you’ve generated — the actual revenue and the IP that could potentially generate income for your family after your passing.