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Let’s start out with the basics, shall we? A sole proprietorship is an unincorporated business owned and run by one individual with no distinction between the business and the owner. It’s also the simplest business structure under which you can operate a business—they’re easy to set up, there’s less bureaucracy involved, you get to make all the business decisions, you get to control all the profits, and you don’t have to file a separate tax return for the business—see, easy peasy. Perhaps that list of “pros” is why sole proprietorships are the most popular form of business structure in the United States.
That said, there are some cons you’ll want to consider before you decide not to incorporate.
- First up, let’s talk about unlimited liability–sounds scary already, right? Operating a sole proprietorship means you, as the business owner, are personally responsible for the business’s debts and obligations beyond the investment you’ve made in the company. That means you’ll be putting your own personal assets (we’re talking your car, home, banks accounts, etc.) at risk. Commence nail biting.
- Next up, do you envision your business operating even if something happens to you? If the answer is an emphatic “yes” or even just a tepid “maybe” then this business structure might not be for you. Not to be a Debbie Downer, but if you’re a sole proprietorship and something terrible happens to you (death, mental incapacitation, etc.), your business will likely be terminated. C’est la vie!
- Money, money, money! Sure, you own all of your business’s assets and you get to control the profits, but if you think you’re going to need financial assistance at some point being a sole proprietor might impede your ability to raise capital. How so? Well, unlike a corporation, you can’t sell shares to investors. Furthermore, banks typically require that a business incorporate before they’ll lend them money. That limits you to relying on savings, credit cards, and the generosity of family, friends, etc.
- Finally, and this may or may not matter to you, sole proprietorships can look less professional than a corporation or LLC—and remember, sometimes perception is key.
Now that you’re aware of the cons of operating as a sole proprietorship, it’s time to answer the age-old question: To incorporate or not to incorporate…and, if you’re going to incorporate which entity type is right for you? To get you started hop on over to our site and meet Mr. Simple Chart—his sole purpose in life is making this complicated decision a little simpler for you.