Who Pays the Debts?
As easy and convenient it is to be Sole Proprietor, it has one major drawback. Sole Proprietorship liability is unlimited. Since there is no legal distinction between the business and its owner, thatmeans that the owner remains fully liable for any debts created by the business. If you are a sole proprietor and make a bad business decision (or many), then you will probably be held liable for any debts. If you can't pay up, your assets could be liquidated, including your personal and real property. While priority may be given to your business assets, don't count on the creditors being lenient.
What Are the Alternatives?
If you run a business where the risk of ending up in debt is high, Sole Proprietorship liability may put you at a severe disadvantage. In these cases, looking for alternatives that may protect you from liability should be considered. It may be wiser for you to incorporate your business as either an S corporation or a limited liability company (LLC). Both are considered separate legal entities and as such only they would be held liable for any debts incurred in business. Of course, the disadvantage is that they are more complex and require some amount of paperwork to create.
We can help you incorporate your business, and we'll take care of the paperwork.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.