Why No One Should Start A Sole Proprietorship.
Forming a sole proprietorship for your business is probably not the best idea. Registering with the state is the first official step for many up and coming business owners. While some businesses file right away, others wait until they’ve seen a certain amount of return, warranting the action.
Knowing what type of entity to file can be confusing, but we can almost guarantee a sole proprietorship is never the answer. For most businesses, a sole proprietorship carries more disadvantages than perks. With that in mind, MATS is here to explain why it’s rarely a good idea to file as a sole proprietorship.
Financially and logistically it just doesn’t make sense. The business structure has everything to do with finances. Not only concerning liabilities but when it comes to attaining capital in the form of loans and other investments, the structure of your business makes a difference.
The biggest disadvantage being that there is no separation between the owner and the business legally or financially. Therefore leaving your personal assets at risk should your business go into debt. All it takes is one lawsuit to lose everything.
Another disadvantage of registering as a sole proprietorship is the lack of access to financial capital. As a sole proprietorship, it is more difficult to demonstrate the worth of the investment.
Finally, sole proprietorships do not receive the same tax benefits as LLCs and corporations. With a sole proprietorship, a person is taxed on all net income and can even be hit with an additional self-employment tax.
As a corporation, you may qualify for more deductions and have more flexibility to take actions like bringing on partners or hiring family which brings the next point, another main disadvantage is changing the structure of the businesses.
In a sole proprietorship, you can’t bring on partners without changing the structure of the business which has the potential to be both timely and costly.
Don’t go into formatting a business blindly. Do the research and weigh all the options to ensure that you choose a structure that is the most right for your business. Not all sole proprietorships are bad, but they have limited space for growth and change – two unavoidable parts of business ownership. For more information schedule a consultation with a MATS consultant.
