Sole proprietorships why and why not
4 Reasons Why Your Business Should Be a Sole Proprietorship and 2 Reasons Why It Should not
We’re in a middle of a series on things you need to know before you start a business. In this episode we’re going to be talking about should you be a sole proprietor, four reasons why and two reasons why not. So let’s take a look.
There’s more than one way to structure your business. You can be a sole proprietor, which is by far the most common, or then you can be a corporation, you can be a partnership. There’s more than one type of corporation. All of those we’re going to discuss in future episodes. But in today’s episode we’re going to focus in on four reasons why and two reasons why you should not be a sole proprietor as a business owner.
First reason why, it’s fast and simple. You don’t need articles of incorporation, you don’t need partnership agreements, you don’t need all of the other agreements that come with the corporation’s bylaws and the like. You just start a business, you would probably need business licenses, but you would need those anyway. You might need zoning clearances but you would need those anyway. Just to start up your business you can sit down today and say okay, here I am, Mr. Me, and this is my business. It’s easy, simple to start up.
Reason number two, you don’t have any stockholders or partner/partners to answer to. You are the sole one that is the owner of the company, so you don’t have to report to stockholders, you don’t have to report to partners.
Reason number three. That means you would be the sole decision-maker. You don’t have to sit down with your Board of Directors and decide on capital improvements, or on direction, or pricing or that kind of stuff. You decide what it is you want to do, when you want to do it, how you want to do it, what’s it going to cost. If you have a partner, same thing as having a Board of Directors, you’re going to have to discuss with that partner or partners what it is you’re going to do, how you’re going to do it, what it’s going to cost, and then how that will affect you and your business. You don’t need that, if you’re a sole proprietor.
Reason number four. It’s a much simpler tax return. Now, I’m speaking here specifically in the United States, I do not know the way taxes are calculated in other parts of the world, I only know how they are done here in the United States. If you’re a sole proprietor here in the United States, you report that income on a schedule C, as self-employment income, because you are employing yourself in your company. Then your expenses are reported on the schedule C, if you have a net profit as a result of that, and you may owe Social Security as a result of it, you may owe income taxes as a result of it, you may not own anything as a result of it, it’s a simpler tax return if you are a sole proprietor.
But there are two downsides.
Reason number one why you should not be a sole proprietor is it can be more difficult to get financing, especially in the long term. Now, if you are a sole proprietor and you go to a bank and you want to borrow some money or if you go to a lending source and you want to borrow some money, they’re going to lump everything together, your personal income, your personal expenses, your personal tax return, that’s all considered one and the same. Then they’re going to take a look at it and they do not actually regard you as a business, they regard you as a person coming in to get money. When you want to borrow money for your business then it becomes a little more difficult to do, and if you’re looking for long term capital it can be a lot more difficult to do if you are a sole proprietor. That’s why they sort of look at with more favor in terms of corporations and in terms of partnerships, because there are some advantages there for them as a lender.
Reason number two why you should not be the sole proprietor is personal liability. There’s a courtroom in this picture here. If you are a corporation there’s a firewall between you and your personal finances and your business. So if you are sued in your business and there is a judgment rendered against you they cannot come after your personal property, they cannot come after your personal finances, only the assets of the business. This may be the biggest reason why you should not be a sole proprietor very long.
Now, here’s the good thing. You don’t have to decide today. You can start as a sole proprietor and you can become a corporation any time. So if you’re uncertain about the future of the company or if you just don’t want to go through all the paperwork to get a corporation set up and started, and by the way it’s a lot easier than you might think, but if you don’t want to do all that you can start as a sole proprietor. I recommend a corporation, however you need to take into consideration your particular circumstances, the dynamics that exist in your country when it comes to loans, when it comes to liability, and decide whether or not a corporation is the way to go. Almost always it is. Next week we will talk about partnerships, why you should and why you should not, and then the week after we’re going to talk about incorporation. So we have three in a row on business structure. Today was sole proprietorship, next week partnerships, why you should and why you should not and finally incorporations and how to do it and why you should and why you should not. So standby for those and we’ll see you next week.