The Top 5 Reasons To Avoid Sole Proprietorship
Many entrepreneurs boast about their sole proprietorship and its relative lack of complications
. Complete freedom and flexibility without consulting others, no convoluted ownership agreements or separate tax or other filings. If it's "just you" as consultant/contractor to other businesses, why bother to be tied up in meeting minutes and structure?
Well, it's a law of nature and balance that for every yin, there's a yang; every action breeds a reaction; every silver lining has a cloud. And the "clouds" hanging over a sole proprietor can create a deluge of catastrophic proportions.
Cloud #1: You risk everything. A benefit of a limited liability company or a corporation is that the structure protects you personally against liability. A sole proprietor lacks that shield and puts all personal assets such as your home, savings, car, bank accounts, jewelry, at risk. How likely are you going to get a ruling against you in court as a sole proprietor? Think on the computer programmer whose incorrect code causes a server to fail? The clothing designer whose newest collection looks exactly like another's? The tax accountant whose incorrect filings caused an audit? Sole proprietors are at great risk in a litigatious society, and often are unable to pay for a lawsuit or a judgment. Why risk your own assets?
Cloud #2: Point of no return. A business can be felled by any number of factors ' a depressed economy, clients who refuse to pay or negative court judgments. In the case of limited liability entities, they can go through a bankruptcy without a negative impact on the owners. That is not the case for the sole proprietor who is the business, and a business failure equates to a failure for the owner. This means the sole proprietor has to declare personal bankruptcy, a black mark that stays on the credit record for at least 10 years. While described as a "fresh start" a bankruptcy can be a drag on your credit, for a very long time.
Cloud #3: Losing out on business openings. Big companies hire independent contractors to avoid expenses such as employment taxes. However, assignments can last for several months, if not years, at which point the consultant/contractor looks a lot like a regular employee. Increasingly, companies prefer consultants who are set up with limited liability entities, because the latter come across as being truly independent of their owners. Is this an illusion? Not one you can overlook if you are missing out on gaining the bigger and better paying clients.
Cloud #4: No room for growth. Small businesses grow by joining hands with other business owners, who infuse new capital, new customers, and affordable labor. However, a sole proprietorship cannot have more than one owner, and in order to grow, you have to create a new business structure. If you are already a limited liability entity, you have far more choices on whom to invite in, and how, and you still remain in charge, but this time of an expanded business.
Cloud #5: You set reachable limits on yourself. If you are already working all hours of the week as a sole proprietor, why not earn more from each hour of output? You may be quite content as a one-person business, but you can reframe your business perspective for greater success when you are an LLC or a corporation. Think of how dressing up in a suit makes you feel more confident for an important business meeting. Hanging your shingles as an LLC or corporation has the same effect. You have a great deal of expertise ' being able to analyze financial statements and to devise profitable strategies ' in running your one-person business; why not get more for the same amount effort?
As you can see, there are lots of significant factors that can cloud the life of a sole proprietor. But you also have options to hedge against their risks. Don't make this decision alone - be smart and find the right people (such as a small business attorney and accountant.) to help you. Avoiding sole proprietorship may be just the smart move to bring your business to Cloud 9!
Copyright (c) 2010 Ask The Business Lawyer
by: Nina Kaufman
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