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Why Sole Proprietorships Are Not a Good Choice

When many people start their businesses, they opt to set the business up as a sole proprietorship. On the surface, this looks like the best option, because there are no additional costs for starting up the business, and no special forms need to be filed. All that is needed is a business license, which is very easy to obtain. Furthermore, a sole proprietorship does not require the owner to follow any special operating rules when running the business, and there are no complicated tax forms to file. Overall, setting up a sole proprietorship is the easiest and fastest way to start a business.

Unfortunately, what many small business owners don’t realize is that is where the advantages end for a sole proprietorship. The disadvantages are numerous, but small business owners who are just getting started often don’t take the disadvantages seriously, or simply cannot see past the startup advantages of a sole proprietorship. In the end, this can cost them quite a bit of money, and ruin them financially – from both a business and a personal standpoint.

The biggest tax disadvantage of a sole proprietorship is that the owner is taxed on all the net profits of the business. It doesn’t matter how much they actually personally earned from the business, or how much money is kept in an account to meet business expenses. The money is considered to be the owner’s personal income by the Internal Revenue Service.

Should the business owner need to borrow money for the business at any time, they will find that it is difficult to borrow money for a sole proprietorship. Lending institutions look more favorably to corporations and limited liability companies when it comes to lending money. Private investors also look less favorably on sole proprietorships, and the owner doesn’t have any shares of stock that he can sell to raise capital either.

The biggest disadvantage of a sole proprietorship is the liability issue. The owner of the business is liable for all of the businesses debts and actions. There is absolutely no level of protection for the owner. If the business is sued or gets into debt, the owner is personally liable for those debts.

A sole proprietor risks not only the business and the business assets, but their personal funds and assets as well. Too often, business owners don’t think anything like this will happen to them – and then it does, and they find that it would have cost them less money to incorporate or form an LLC than they now owe in business debts that they are personally liable for.

Incorporating isn’t the right answer for many small business owners either – where a sole proprietorship doesn’t offer enough protection, a corporation may be more complicated and more entailed than what a small business really needs. If a sole proprietorship would suit your business needs better than a corporation, you should consider a limited liability company (LLC) instead. This offers you the protection of a corporation, but operates as a sole proprietorship, and you get the best of both worlds. LLC’s are not as easy to set up as sole proprietorships, but they are not as hard, or as expensive, to set up as corporations, and in the end, they are well worth the small expense and effort that is required.