In today’s world, where many goal-oriented individuals have ideas that end up as small businesses, a sole proprietorship is often the easiest way to claim ownership of ideas and products. Unfortunately, there are also disadvantages and downsides to this concept, although some owners may stay with this idea until the very end. Because a sole proprietorship is inexpensive, simple and fairly easy to set up, many who want to own their own business turn this way first. Before you determine how you want to run your own business, it’s important to understand the disadvantages associated with a sole proprietorship.
Raising Money Is Difficult
As a small business with one proprietor, it can be difficult to raise money to invest in the business. While borrowing money is always an option, many proprietors are forced to use their own personal assets as collateral against the loan, which has its own set of risks involved. If a business owner is forced to use personal assets as collateral, then those things are at risk if the business fails. Many proprietors use their homes or cars as collateral, which puts their family at risk in the long run.
Corporations, on the other hand, often raise money by selling shares – which gives them the capital needed to invest in and grow the business. Unfortunately, in a sole proprietorship, there is no way to sell shares, as there is only one owner of the company and that ownership cannot be split in order to raise capital. This makes it hard for a sole proprietor to find ways to raise capital for advertising and new products and services.
Owner Death Means the Business Ends
Unless a clear, detailed estate plan is created from the beginning, if the owner dies while the business is still functioning, the business dies also. With a corporation, there is something known as a “perpetual existence,” which means that the company continues until those in charge decide to dissolve it. With a sole proprietorship, the business is simply gone once the owner is. If families depend on this income to survive, then they are left without a way to make money. Consumers are also left without a product or brand they are invested in, and your goals and ideas have no way to continue on.
Owner Assets Are Business Assets
In a sole proprietorship, all personal assets are also considered assets of the business, unless the business is set up separately from the beginning. This means that everything you own personally is at stake if the business fails. Debtors can come after your personal assets in order to meet debts. If there is an accident on your property and an individual sues, you may be required to pay out of your own pocket in order to resolve the lawsuit.
In contrast, businesses that are set up as a corporation are separate from personal assets. Anything the business owns or has may be at stake if there are problems, but personal assets are protected and risks are minimized. Business owners often choose to set up a corporation or limited liability company in order to protect personal assets when business risks are involved. While you want to take chances in order to build a successful company, it may be necessary to protect your personal life from your professional one.
Know Your Risks
Many entrepreneurs don’t mean to start their own business. They have an idea for a product or service that they begin selling, and before they know it, they are running a successful small business. If this business hasn’t been set up as a corporation, certain risks are inherent. Before you start your own business or corporation, it’s essential that you understand the risks involved with being a sole proprietor.
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