There are no small minds or small ideas. However, there are small businesses.  Any business that has fewer than 500 employees is a small business.

If you were to place a bet, would you bet on small businesses or large companies? I would have bet it all on the large companies, because small businesses seem like a small market – pun intended.

So, I was shocked to learn that there are 32,540,953 million small businesses and only 20,516 large businesses. Also, 81% of businesses have no employees (also known as “nonemployer firms”). This means that most businesses in the U.S. are sole proprietorships.

That’s brave and scary to hear at the same time. On the one hand, I’m rooting for all the people who decided to start a business [without any employees]. On the other hand, I’m shaking my head and saying, “What were you thinking?”

A sole proprietorship is a business that you don’t have to register or incorporate. It’s also a business that treats the sole proprietor (or owner) as the same entity as the business. So, there is no separation (or separate identity) between a sole proprietorship and its owner.

That may sound appealing [at first]. You don’t have to pay fees to get registered or file any formation paperwork. However, there are disadvantages of a sole proprietorship.

For example, you may lose your shirt, savings, house, car – you get the point.

Sole proprietors can’t hide behind a wall of liability protection. Since there’s no wall of separation between a sole proprietor and their business, the owner’s personal assets are at risk. This can include any property in the owner’s name.

So, going all in on a sole proprietorship business is risky. Calling a customer’s bluff can prove dicey as your business grows.

According to the Small Business Administration, between 36% and 53% of small businesses are involved in a lawsuit. Even if the lawsuit is frivolous, a sole proprietor’s pockets, mental health, and reputation may suffer.

With the cards already stacked against a sole proprietorship, the business might topple over if it hires employees. Only 14% of small employer businesses are sole proprietorships. Specifically, these small businesses have paid employees (also known as “employer firms”).

Yet, more than 50% of small employer firms are S-Corporations. So, what do these S-Corporations know that sole proprietors don’t know?

It’s simple. That small businesses are legally responsible for the actions of their employees. The small business’s liability can also extend to an employee’s injuries on the job and other employee-related lawsuits, e.g., discrimination, harassment, wrongful termination, etc.

There’s no way to prevent all lawsuits, but small businesses can increase their odds by lowering their risk. For example, a small business owner can create a limited liability company (LLC). An LLC will protect a business owner’s personal assets if their business is sued.

Also, small business owners should use business contracts, which set the expectations for those who use its services or products. These contracts can include website user agreements, service agreements, employment agreements, etc. Whenever it’s possible, contracts should be used every time.

If you’re still mesmerized by the allure of a sole proprietorship, I urge you to at least get insurance. Business insurance can help protect your business if a customer or company decides to sue you. For example, general liability insurance can provide insurance coverage for property damage and bodily injury damage.

Of course, you should do your research. Choosing the right business entity is an important decision. Also, each type of business, LLC, sole proprietorship, corporation, etc. has other important differences, e.g., business taxes.

Regardless of the business entity, only 67.6% of small businesses survive at least the first two years. So, creating a business with liability protections can prevent avoidable legal problems and raise your survival rate.

Wrapping It Up

Sole proprietorships have their benefits in the beginning. But at some point you’ll have to take off the training wheels. Think bigger. Like elevating from playing solitaire to playing poker or blackjack.

So, make sure the benefits of any business structure you choose give you a higher odds of attaining success. That means weighing the disadvantages of a sole proprietorship against any advantages.

I hope that you will play your cards right when deciding if a sole proprietorship is your best bet.

Do you have the balls to go all in on a sole proprietorship or will you place a [safer] bet on an LLC?