It is not uncommon for new business owners to file as a sole proprietorship. In fact, according to The New York Times, this is the simplest and most common entity to register as. But does that mean all companies or industries should go the sole proprietor route? The truth is, 90% of all businesses will be involved in a lawsuit at any given time. With sole proprietorships offering virtually no liability protection, companies in very litigious-friendly industries are at more risk of financial and reputation loss. To prevent this type of outcome, read on to learn what professions may want to consider a more formal business structure. (Plus, learn why you may want to conduct a New Jersey secretary of state business search.)
1. If You’re a Doctor, Think Twice About Sole Proprietorships
Doctors in general are at risk of a malpractice suit. But, according to CBS News, oncologists, pulmonologists, urologists, obstetrician/gynecologists, gastroenterologists, plastic surgeons, orthopedic surgeons, general surgeons, thoracic-cardiovascular surgeons, and neurosurgeons stand a greater chance of being sued; in fact, one in five neurosurgeons will get sued. With such a high risk of a malpractice suit, it may be wise to not register as a sole proprietorship — even if you have malpractice insurance. Even for primary care physicians and other doctors not on the high-malpractice list, it still is a good idea to consider a different business structure.
In a 2015 survey, out of 4,000 physicians polled, almost 60% (59%) claimed they were named in at least one malpractice lawsuit. The survey further revealed that the top three reasons for a malpractice suit was failure to diagnose (31%), suffering from an abnormal injury (31%), and failure of to treat (12%). Plus, diagnosis errors happen in 10% to 15% of medical cases. What we are trying is not having an LLC or corporation set up opens you up to having your personal assets in jeopardy should you see the court room.
2. A Sole Proprietorship May Not Be in a Lawyer’s Best Interest
While some lawyers do take the sole proprietorship route, several don’t, and here’s why. Like doctors, lawyers can (and do) find themselves on the end of a malpractice suit.
Some reasons behind malpractice suits include:
- the lawyer does not continue working on his or her client’s case
- the case is thrown out because of the lawyer did not handle the case correctly
- the lawyer recommends a lower settlement than originally he or she predicted
- the lawyer settles the case without first confiding with the client
- the lawyer socializes with opponent’s lawyer
- and the lawyer misuses the retainer.
As we’ve mentioned, a very big disadvantage of a sole proprietorship is that it has no liability coverage. If you are sued for any of the reasons listed above, you stand to lose not only your business assets and license but personal assets as well.
Consider a Limited Liability Partnership
One common business structure lawyers use is a limited liability partnership; this type of business entity fuses your typical partnership with limited liability protection. One reason why they are appealing comes down to less paperwork requirements (than LLCs and corporations) and the ability to easily add on more partners. Also, unlike with LLCs, the actual LLP business does not need to file its own taxes — so, again, less paperwork.
3. Construction Companies May Need to Think Again About Sole Proprietorship Status
Construction companies and any other company in an injury-prone industry may want to steer clear from sole proprietorship. Why? Again, it boils down to liability protection. But, instead of malpractice suits, think personal injury and worker’s compensation cases. To put this into perspective, consider this example: a construction worker on the job is struck in the head by a beam. While the worker’s injuries—a moderate concussion— are minor, now they have grounds to sue. In fact, the construction company is lucky considering that 9.4% of worker’s deaths resulted from being struck by an object. With zero limited liability coverage, the owner’s personal assets are at stake.
Long story short, one-fifth of worker’s deaths in 2016 were in the construction industry, making construction a highly injury-prone (and dangerous) working environment. It would be a construction company’s best interest to register as a corporation or LLC in case worse comes to worst.
4. Tech Companies May Want Another Business Entity Structure — Here’s Why
Not to say personal injury or malpractice suits don’t happen in the tech industry, but tech companies may overlook sole proprietorship stats for another reason. Three words: venture capital funding. Venture capitalists tend to bypass sole proprietors because, unlike LLCs and corporations, sole proprietors cannot give stakes or shares. While sole proprietors can always get funding from other avenues like donations, angel investments, and personal loans, tech sole proprietorships now have one less option.
Sole Proprietorships Could Be A Viable Option If…
For tech companies initially making less than $50,000 in revenue, a sole proprietorship may be fine. However, for those over and in search of funding, a more formal business structure may be the best way to go.
Final Thoughts: Ditch the Sole Proprietorship Status or Not?
The truth is, it depends. For companies in litigious- and injury-prone industries, you may want to consider a more formal business structure. However, if you are not, don’t expect to make more than $50,000 and have liability business insurance, a sole proprietorship could work. Just be sure to discuss your business and financial options with a well-established, reputable financial advisor and/or business coach. What industry do you work in? Has that determined what business structure you chose to register as? Have you changed business entities? If so, why? Please be sure to leave your comments in the comments section below.
Interested in Conducting a New Jersey Secretary of State Business Search?
Or how about a North Carolina business entity search? Or maybe a South Dakota business name availability or District of Columbia business search? If so, Sec States, a user-friendly database of secretary of state pages, is happy to help.