If you have a business you probably shouldn't be a Sole Proprietorship. It's really that simple. A Sole Proprietorship has no separation of business liability and personal liability. This means that if you get sued, your house, your car, even your future earnings are potentially at stake. I used to say that if you're small, you can wait, but I'm really not so sure about that anymore.
It does cost quite a bit of money to change your classification, but it's fairly easy, and you don't have to get too complicated. It costs between $200 and $600 dollars to become a Single Member Limited Liability Corporation, and you don't even have to change the way you file taxes. As a Single Member LLC, if you get sued, or have liabilities, only the business assets are at stake.
There are other entities to consider, but they are beyond the scope of this little post. I just wanted to make the point that you should already be thinking about how to protect your personal assets from business problems. Get some advice, or do some research, but don't wait. You never know what's coming.
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