Self Help

There is one major disadvantage to being a sole proprietor: You are personally liable for all the enterprise’s debts, all its obligations, and all claims against it. Your liability isn’t limited just to the amount of capital you invest in the business. Nor is your liability limited to the total assets of the business. Your home, your car, your bank account, and your other possessions may be claimed by people to whom you owe money. Conversely, if you have unpaid personal debts, your creditors can seize assets of your business to satisfy their demands. You’re stuck with what lawyers call “unlimited liability.”

A sole proprietor hasn’t much financial flexibility. Outside capital may be hard to coax in, since it depends on his personal credit rating. Business credit is likewise limited. All those closed doors may make it hard for an owner to expand his business, or to work his way out of trouble if the cash flow goes plop.

Also, a sole proprietorship is almost completely dependent on the owner’s abilities. If he gets sick, or if troubles at home throw him into a tizzy, the business is bound to suffer. A lack of expertise in just one side of the business, like judging credit risks, can put the whole venture into the ashcan.