As the sole proprietor of your business, you have many distinct advantages, such as complete control over your business and ease of startup. If you run a corporation, you may be subject to double taxation due to the need to file both business taxes and personal taxes. You do not have this problem if you are a sole proprietor; all your business profits go on your personal income tax return.
Perhaps the most notable characteristic of a sole proprietorship is the fact that there is no legal distinction between the business and you, its owner. This can be both a benefit and a drawback. It means that there is no limit to your liability for business debts, making your personal assets vulnerable. On the other hand, if your business venture is ultimately unsuccessful and you cannot pay your debts, you have multiple bankruptcy options available to you as a sole proprietor.
Chapter 7 bankruptcy
Chapter 7 bankruptcy is available to both businesses and individuals. Because you are legally indistinguishable from your business as a sole proprietor, you may file Chapter 7 bankruptcy and discharge both your personal and business debts at the same time. The downside of this, however, is that your personal assets may be subject to liquidation in addition to your business assets.
Chapter 13 bankruptcy
Ordinarily, a business is not eligible to file Chapter 13 bankruptcy. However, sole proprietorships are an exception because Chapter 13 is available to individuals and the law makes no distinction between the sole proprietor and the business. Chapter 13 allows you to reorganize your debts so that you can pay off at least a part of them over time.
Chapter 11 bankruptcy
Chapter 11 bankruptcy is similar to Chapter 13 in that it allows you to reorganize your debts. The main difference is that, as Chapter 13 is usually only available to individuals, Chapter 11 is usually only available to businesses. Any type of business, including a sole proprietorship, is eligible to file Chapter 11.
Other eligibility requirements may apply that affect your ability to file under a particular chapter. However, as a sole proprietor, any of these options may be available to you.