Top 5 Reasons to Avoid Sole Proprietorship

“Life is a problem; only death is notcomments Zorba the Greek in Nikos Katzanzakis’s novel. I’ve heard many business owners brag about the lack of hassle their sole proprietorship status affords them. No messy property deals, no separate filings or taxes, complete freedom and Flexibility to do what you want when you want And if it’s “just me” working as a contractor/consultant for other companies, why get so involved in meeting structure and minutes?

Well, it is a law of nature and balance that for every yin, there is a yang; every action begets a reaction; each positive side has a cloud. And the “clouds” that hang over a sole proprietor can create a deluge of catastrophic proportions.

Cloud #1: You risk the entire ball of wax.

One of the benefits of doing business as a limited liability entity (such as a corporation or limited liability company) is that the structure (which is so difficult for the sole proprietor to manage) acts as a protective fortress against personal liability. Sole proprietors don’t have that shield of protection. As a result, all of your personal assets are at risk in the event of a trial or lawsuit. Personal property, such as your home, bank accounts, savings, car, jewelry (which can be sold to pay a judgment). How remote is a trial against him? For the IT consultant whose network configuration inadvertently crashes the server? The graphic designer whose design may have infringed on someone else’s? The independent sales representative accused of misusing a company’s contact list? The marketing consultant whose plan didn’t produce the promised results? In a suit-happy society, sole proprietors often don’t have the “war chest” to fund a lawsuit or pay a judgment. So why risk Grandma’s engagement ring or her life savings? It’s like jumping into a pool of hungry sharks: you might not get eaten, but why would you want to put yourself in such danger in the first place?

Cloud #2: A house of cards falls apart easily.

Erratic economies, slow-paying (or non-paying) customers, or lawsuits noted in the #1 cloud can all contribute to the demise of a business. Limited Liability Entities have the option of taking the business through bankruptcy proceedings, without this having to affect the owners of the business. But with sole proprietors, the business owns. The two are inseparable, no, identical. Therefore, the damage to the business is equal to the damage to the sole proprietor. If a sole proprietor is looking for a way out through bankruptcy, he should file for personal bankruptcy. Bankruptcies can stay on your credit history for 10 years and even longer, so the fresh start that the bankruptcy process is supposed to provide can become a millstone around your neck…for more than a decade .

Cloud #3: You may miss out on business opportunities.

Larger companies like to use independent contractors because they don’t have to pay Social Security and Medicare taxes on your behalf. However, consulting assignments, although temporary positions, can last for months or even years. If that happens, a consultant/contractor could be dangerously seen as a part-time (or even full-time) employee. As a result, an increasing number of companies will only do business with consultants who operate their businesses as limited liability entities, as the limited liability form gives some presumption that the business is truly independent. Is this form over substance? Not if sole proprietors are missing out on attracting bigger, more prosperous clients.

Cloud #4 – Reduces opportunities for business expansion.

One of the most significant ways for a small business to expand is to attract other business owners because they can contribute capital, contacts, and cheap labor. But you can’t have more than one owner in a sole proprietorship: by definition, it’s “just you.” Therefore, incorporating a business owner essentially means that you have to create a new business…literally, as a new entity will have to be established. However, if you already have a limited liability entity, you can control who joins you and on what terms. In short, it can still be your business, only bigger and better.

Cloud #5: You risk thinking small.

There is no law that says you have to want to be a millionaire if you start a business on your own. You can be quite content to remain a one person operation. But just as putting on a suit to go to that important client meeting (or special date) makes you feel and act differently, having a limited liability entity can also help formalize your thinking and allow you to run the business smoothly. instead of running from pillar to post. There is a lot to know about running a business, much of which has to do with understanding financial statements and what makes your business profitable. For the same 168 hours a week, wouldn’t you rather make more money than less?

As you can see, there are many important factors that can cloud the life of a sole proprietor. But you also have options to protect yourself against your risks. Don’t make this decision alone – be smart and find the right people (like a small business attorney and accountant) to help you. Avoiding sole ownership may be just the smart move to bring your business to Cloud 9!