The Disadvantages of Being a Sole Proprietorship
A sole proprietorship is a business structure in which the business and the owner are, legally speaking, the same entity.
There is no legal separation between the person and what he does for his business income. Many people choose to start their businesses as sole proprietorships because the idea of incorporating or forming a Limited Liability Company seems intimidating.
For some, operating as a sole proprietor makes sense,many freelancers claim sole proprietorship, as do business owners who work independently.
Unfortunately there are disadvantages to doing business as a sole proprietorship instead of as a corporation or an LLC. Here are some of the disadvantages of being a sole proprietorship:
1. There is no limit to your liability. As a sole proprietor you are personally responsible for all of the debt that your business incurs.
This means that your own bank account and personal possessions can be taken charge of if you cannot pay your debts from your business account. In the government's eyes, you and your business are one entity and there is no line between your personal fiscal responsibility and your professional fiscal responsibility.
2. Finding investors for your business endeavors can be difficult. Many investors simply will not invest money into or loan money to a sole proprietorship because there is no guarantee that the funds loaned for the business will not be used for personal gain as well.
This means that, usually, funding a sole proprietorship is done out of the owner's own bank accounts and with his or her own credit cards. Starting a business that way is a tremendous financial burden to bear.
3. Sole proprietorships are rarely able to deduct the cost of their health care and medical bills on their taxes. When operating as an LLC or Corporation, technically your business pays for your health care benefits, which make those benefits tax deductible. As a sole proprietor you are neither employer nor employee so all of those costs are taken out of your pocket and rarely deducted come tax time.
4. If you want to expand your business and hire help, attracting good employees is more difficult as a sole proprietor. A corporation or an LLC give employees incentive to work their way up because one day they might become a partner or part owner of the company. There is no guarantee of that with a sole proprietorship so there is little reason for an employee to remain loyal to your business.
5. You are limited in the size and scope of your business. It is rare that a sole proprietorship is able to operate in more than one state or internationally and the taxes involved in doing so are complicated and costly. If you want to grow your business beyond a "mom and pop" style operation, it is in your best interest to change your business's structure to an LLC or corporation.
6. There are many advantages to operating as an LLC or a Corporation that are not available to sole proprietorships.
About the Author Scott Letourneau CEO of Nevada Corporate Planners, Inc. Since 1997, NCP has helped over 5,000 clients form LLCs and corporations to get their business off to a fast start! http://www.IncorporatingSecrets.com for an 80 pg report, an actual case study on the strategies and formation of an LLC.
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