Starting a business as a sole proprietor is the most straightforward and common way to establish a small business in Tennessee. However, owning a business as a sole proprietor has both positive and negative consequences that you should be aware of before starting one yourself. Some of the benefits of a sole proprietorship include simplicity and control, tax advantages, and privacy. However, there are risks associated with a sole proprietorship like difficulty in raising business capital, a limited lifespan, and most importantly unlimited personal liability. In Nazi v. Jerry’s Oil Co., Inc., 2014 WL 3555984 (Tenn. Ct. App. July 18, 2014), the Tennessee Court of Appeals explained that a sole proprietorship “is the oldest, simplest, and most prevalent form of business enterprise.” The simplicity of setting up and running a sole proprietorship is a significant advantage. There are minimal legal formalities and low startup costs compared to other business structures.“[A] sole proprietorship is nothing more than an individual conducting a business for profit, which in turn becomes his income.” Koch v. Koch, 874 S.W.2d 571, 576 (Tenn. Ct. App. 1993). Sole proprietors benefit from pass-through taxation. This means that the business’s income is reported on the owner’s personal tax return, avoiding the double taxation that corporations face. The IRS treats the business and the owner as one entity for tax purposes. This can result in a lower overall tax rate and simpler tax filing process. Also, sole proprietorships often enjoy more privacy than corporations, as there are fewer public disclosure requirements. The owner does not have to reveal financial statements or other sensitive information to the public. However, the most significant risk of a sole proprietorship is the owner’s unlimited personal liability. The owner is personally responsible for all the business’s debts and obligations. This means that personal assets, such as a home or car, could be at risk if the business incurs debt or is sued. A sole proprietorship necessarily involves individual liability. Dexter Ridge Shopping Center, LLC v. Little, 358 S.W.3d 597, 608 (Tenn. Ct. App. 2010) (noting that because the business was a sole proprietorship, the question was whether its owner/proprietor was liable, as the business did not constitute a “separate legal entity”).Also, sole proprietorships may find it challenging to raise capital. Investors often prefer the protection and potential returns of corporations or limited liability companies. Additionally, banks may view sole proprietorships as higher-risk ventures, making it harder to secure loans. Finally, the business’s lifespan is directly tied to the owner’s involvement. If the owner retires, becomes incapacitated, or dies, the business may cease to exist. This lack of continuity can be a significant drawback for those looking to build a long-term business legacy. It is for these reasons that many small business owners opt to create a limited liability company or corporation. Creating one of these alternative business structures starts with filing the proper documents with the Secretary of State in Tennessee. It is important to remember that each structure has its own risks and benefits and discussing your options with a professional can ensure you are making the right decision. So, if you are contemplating starting a business or are already in business as a sole proprietor, it is crucial to consider your personal circumstances and goals to determine which structure works best for you. Consulting with a knowledgeable attorney can provide valuable guidance and help you make the best decision to protect yourself, your profits, and your legacy. At King Law Offices, we understand the complexity of these situations and are here to help. Our experienced attorneys can guide you through the process. Contact King Law Offices today at (888)-748-KING (5464) for a consultation.
