When you embark on an entrepreneurial journey, you’ll have to make several decisions. Choosing a name for your business, securing a location, hiring staff, training personnel, obtaining supply chains, and developing a marketing strategy are amongst them. But before you get to the point where you’re making those decisions, you’ll have to figure out which business structure you want to utilize.
It’s an important decision, as the structure that you choose could affect your income, your liability, and the amount of control you have over your business’s operations. Therefore, before setting out to start your business, you need to understand your options. This week, we want to look at sole proprietorships so that you know the risks and rewards of this structure type.
What are the benefits of a sole proprietorship?
For many small business owners, a sole proprietorship is the most appealing. This is because a sole proprietorship offers the following:
- Simplicity: Creating a sole proprietorship is easy. While you’ll have to file some paperwork with the state and obtain relevant licenses, the effort exerted here is far less than what’s required when opening other business types. This can streamline the creation of your business, getting you up and running faster.
- Control: In a sole proprietorship, you call the shots. You’re not accountable to anyone, except maybe your customers, which gives you the ability to run your business as you see fit.
- Ease of transactions: As a sole proprietor, you don’t have to worry about utilizing business accounts and tracking expenses on those accounts closely. Instead, you can accept payments into and make payments from your own personal accounts, which gives you flexibility and ease of use.
If the simplicity of a sole proprietorship is appealing to you, then you should explore it further. However, that includes assessing this structure’s disadvantages, too.
What are the risks associated with a sole proprietorship?
Although easy to create and use, sole proprietorships present several risks. This includes:
- Liability: As a sole proprietor, you’re personally liable for all of your business’s debts. So, if your business goes under or is sued, resulting in a judgment against your business, then you’re going to have to pay those obligations from your own personal wealth. This type of liability can be avoided with other business structures.
- Financing issues: If you go it alone in your business endeavor, you might find it hard to secure the funds you need to get your business where you want it. This means it could take a lot longer to generate the wealth necessary to grow your operations and expand your business’s reach.
- Lack of expertise: Sole proprietors rely on their own expertise to get by. While that’s fine in some circumstances, in others such an approach serves as a disadvantage, as it can limit your ability to address challenging issues and improve your business. Other business structures, like a partnership, allow you to bring in individuals who have various areas of expertise, thereby helping you round out your business and its approach to daily operational challenges.
Which business structure is right for you?
Ultimately, only you can answer that question. However, you can make an informed decision by knowing the risks and rewards of each of your options. That may require you to read up on the various business structures available to you, and you may want to seek guidance from someone who is skilled in business formation.
What’s important is to keep your values and goals in mind and to find a plan of action that gets you closest to them without putting you at too much risk. Armed with the information you need, you’ll hopefully then be able to put yourself on a path to success.