Does it always make sense to set up a business entity or is it better to be a sole proprietor? Why or why not

Answer 1

The issue of incorporating has more to do with legal liability than anything else. If you're in a business that lends itself to some pretty hefty lawsuits (think construction type trades), then you'll need to incorporate to insulate yourself personally from any lawsuits. However, depending what your business is, you might be able to get by with some outstanding insurance. For instance, many businesses can get by with errors & omissions insurance (E & O). You may want to set up an appointment with a CPA or an attorney to discuss your options.