Potential Drawbacks to a Sole Proprietorship

One of the biggest arguments against setting up a business as a sole proprietorship is that, as a sole proprietor, you can be held personally liable for any and all business-related obligations. So if your business defaults on a loan, fails to pay suppliers, or loses a suit in court, creditors can legally go after your personal possessions -- even the roof over your head.

That's why many businesses choose to incorporate or establish LLCs -- those forms offer you personal liability protection for those same business-related obligations. If your corporation or LLC fails, you -- as an owner -- can still likely keep your house and other personal property.

Obtain insurance. If you choose to stay as a sole proprietor, the best way to protect yourself is to obtain adequate insurance coverage for the unexpected. Weltman advises sole proprietors to consider the following:
Property and liability coverage. "If you operate from home, don't assume your homeowner's policy will protect you," she says. You may need to amend the policy or buy separate coverage for the business.
Auto insurance. If you're driving your personal car or truck on business, notify the insurance company to extend protection for this vehicle usage, she says.
Health coverage. Unless you have this through a former employer or under a spouse's/domestic partner's policy, be sure to carry adequate coverage.
Disability coverage. Protect yourself with a policy that will pay if you can't work.

"If you plan to invest considerable time and money in starting a business, consider reviewing your plans with experts," Weltman says. "Discuss the decisions you've made with an attorney, accountant, insurance agent, Web designer, and other professionals for additional guidance."