Deciding to venture out into the business world is a big step. But if you’re interested in fulfilling your entrepreneurial goals, then you have a lot of decisions to make. Amongst them is what sort of business structure you want to use. It may seem like a small choice to make, but it can actually make a huge difference in how your business operates, your risk and your earnings potential. Therefore, before jumping into your business venture full force, you need to research these options so that you can confidently choose the one that helps you meet your goals.
What is a sole proprietorship?
Amongst your options is a sole proprietorship. Here, you solely own your business. This gives you a lot of freedom and flexibility since you’ll be able to make all the calls in how your business is run. It also means that you can make a significant amount of income since you won’t have to share profits with anyone else. Setting up a sole proprietorship can also be easier, saving you time and effort.
While all of that might sound great, there are also risks associated with pursuing a sole proprietorship. Let’s look at them so that you can make a fully informed decision that’s right for you.
The risks of using a sole proprietorship
While there are certainly benefits to a sole proprietorship, there are also several risks. Here are some of the most significant:
- High personal liability: In a sole proprietorship, you aren’t insulated from liability by a corporate entity. Therefore, if your business is sued and a judgement is entered against your business, you’re personally on the hook. Theoretically, then, you could wind up losing major personal assets, like your home, if your business is sued and loses.
- Trouble raising money: Raising money can be difficult when you’re a sole proprietor. You won’t be able to sell stocks in your business to generate funds, and your lack of experience or expertise may leave others weary about loaning you money. Creditors will also be worried about your exposure to liability. This can make it challenging to find the financial resources needed to stabilize your business in its early phases.
- Increased tax obligations: A sole proprietor will be hit with more taxes since they’ll have to pay self-employment taxes and profits will be considered personal income and taxed accordingly. This can significantly eat into your profits, leaving you in a tough spot where it can become hard to make ends meet and to reinvest in your business to grow your operations.
- High responsibility: As a sole proprietor, you’re responsible for every aspect of your business. This can be incredibly stressful and may leave you feeling overwhelmed. When this happens, it can become all too easy to make a mistake that proves costly to your business and your own personal finances.
- A limited ability to grow your business: Due to challenges with raising capital and overextending yourself on a personal level, a sole proprietorship may leave your business stifled, unable to grow to its full potential. This can leave opportunity on the table.
Utilize the business structure that’s right for you
We don’t mean to entirely turn you off from moving forward with a sole proprietorship. However, we do want you to inform yourself about your structure options so that you can make a decision that best protects your interests and the future of your business. With that in mind, you may want to speak with your business law attorney about your goals and your concerns so that you can rest easy knowing that you’ve done everything possible to make the right choice.