The good news and the bad news about sole proprietorships
More than likely, you started your business as a sole proprietorship. It isn’t uncommon for one enterprising soul to nurture an idea and a dream all by themselves for a while until their business starts gaining ground.
Now that your business is finally out of its infancy, is there any reason to change your business structure? After all, a sole proprietorship has worked so far, right?
Sole proprietorships do have a lot of benefits. They don’t require much in the way of paperwork, and there are no costs associated with their formation. Taxation is fairly simple because owners simply report their profits and losses on their own taxes — which saves more money on accounting fees. Many owners also feel like they retain the most control over their businesses when they stick with a sole proprietorship.
But sole proprietorships also come with some pretty big potential drawbacks, including:
Your personal liability, should anything go wrong
Since you and the business are indistinct from each other in a sole proprietorship, you can be held liable for all your business losses. That may not seem too imposing until you realize those losses can include damages for workplace injuries, creditor claims over unpaid business debts if the business fails and lawsuit judgments over broken contracts. Your personal credit can also be damaged by any business mistake.
The inability to easily obtain investors or financing
It’s very hard for sole proprietorships to attract investors and obtain bank credit. Investors and banks are rightfully leery of handing money over to a business that doesn’t keep distinct financial records and isn’t its own distinct legal entity.
You miss out on potential tax breaks
When you have your own business, you’re subject to “pass-through” taxation and self-employment taxes that could be substantially higher than what you would pay if your company was incorporated and paid you a salary.
If you’re trying to decide what structure is best for your growing business, it may be time to get some experienced legal guidance.