If you're running a growing business in Brooklyn as a sole proprietor, you're probably still filing a Schedule C and calling it a day. For a lot of businesses, that's fine — right up until it isn't. Here's where it usually stops making sense.
Unlimited personal liability
As a sole proprietor, there's no legal separation between you and the business. If the business gets sued, or can't pay a supplier, your personal assets — your home, your savings, your car — are all on the table. An LLC or corporation puts a wall between the two.
Self-employment tax on 100% of profit
Every dollar of net profit from a sole proprietorship is subject to the full 15.3% self-employment tax, on top of income tax. Structure the business as an S-corp instead, and only your reasonable salary is subject to that tax — the rest can come out as a distribution.
Harder to raise money or bring on a partner
Banks, investors, and even landlords tend to take a business more seriously once it's a real legal entity. It's also structurally difficult to add a partner or issue equity to a sole proprietorship — there's no framework for it.
No separation for credit and financing
Business credit, business loans, and even some vendor accounts are easier to build once the business has its own EIN and its own legal identity, separate from your personal credit history.
None of this means you made a mistake starting as a sole proprietor — it's often the simplest way to get moving. But if the business is growing, it's worth a real conversation about whether it's time to restructure.