Ahhh, the good life of sole pro­pri­etor­ship and part­ner­ships. You just get your busi­ness license and you’re good to go. No fees to pay to form it. No reports to file.

But there are down­sides. All of your per­sonal assets such as your home, cars, boats, sav­ings, etc. are exposed if your employ­ees or part­ners do any­thing wrong or a con­tract goes south. Your busi­ness assets such as your equip­ment, vehi­cles, and intel­lec­tual prop­erty are exposed when you do some­thing wrong that’s not con­nected to your business.

What does this mean? Gen­er­ally if you’re going into busi­ness by your­self, or are already a sole pro­pri­etor­ship, and don’t have employ­ees, busi­ness assets, and con­tracts, then it makes sense to be a sole pro­pri­etor­ship. If you have a part­ner, an employee, any con­tacts, or valu­able busi­ness assets, then you should seri­ously con­sider form­ing an LLC or cor­po­ra­tion. Yes, you can always buy insur­ance to cover these risks, but becom­ing an entity such as an LLC or cor­po­ra­tion is prob­a­bly the cheap­est insur­ance you can buy.

A few other things to consider:

If you’re a sole pro­pri­etor­ship or part­ner­ship and decide to sell your busi­ness, you can only sell its assets. If you die, then your busi­ness prob­a­bly dies with you.

If you choose to do busi­ness in a name other than your own, then get a busi­ness license in that name. Then you sign things in your name doing busi­ness as your busi­ness name. This is called a d/b/a.