“The most successful people are the ones who are doing what they love.” – Warren Buffett
Why do most entrepreneurs go through the hassle and risk of starting their own business? We do it because we have a burning desire to use our gifts, talents, and skills to help others. Sometimes, we look for the quickest, simplest way to fulfill that desire.
There are many legal types of business entities, and there is no one-size-fits-all solution. Today, we’ll look at the most basic form, the sole proprietorship. It is the simplest, least complicated form of legal business ownership structure, but it comes with some risks. However, I put that Warren Buffett quote at the top of today’s blog because it reminds us of what motivates us to undertake our own business venture in the first place – to do what we love in the service of others – and if doing this as a sole proprietorship helps you reach that fulfilling goal, then at times it can be a useful vehicle.
What are the pros of sole proprietorships? First, they are quick and easy to form. They are fast and basically without fees to set up. You can literally set up your sole proprietorship overnight and be in business tomorrow. There are times when people with a burning desire to launch into a new venture, and when the right first opportunity comes along, may start out as a sole proprietorship as a way to just get going. There’s nothing wrong with that – it takes passion and belief to go into business for yourself. Without it, no small business can survive.
Check out this article from Nerd Wallet about when it makes more sense to choose a sole proprietorship.
But sole proprietorships also have cons. First and foremost, among the risks of this form of business ownership is personal liability. There is no corporate veil that separates the business’ assets from the owner’s personal assets, and in cases of legal liability or debt collections, they are one in the same and all your personal assets are at risk, including your home. There is insurance coverage that can be bought, but it is mostly to cover injury claims and does not cover debt collections.
Another downside to a sole proprietorship is that there are no tax advantages. The owner pays personal income taxes and social security taxes on the business income. Also, as a sole proprietor, it is difficult, if not impossible, to raise capital or get a loan to expand your business.
Another downside of using a sole proprietorship is that when the business owner retires or dies, so does the business. If you stick with this form of ownership for the life of your business, the business dies with you. You can’t sell it or pass it on. This is a major reason to consider the other forms of business ownership that I will discuss in my next blog. For more information about the pros and cons of a sole proprietorship, read this article from the U.S. Small Business Administration.
Starting out as a sole proprietorship really is the fastest way to get into business. In terms of ownership structure and costs, there is no barrier to entry. It’s a fast way to fulfill your burning business desire. However, I strongly recommend that if you do start this way, be prudent and quickly examine the other options. In certain circumstances, it can be a good way to start, but I don’t recommend it as a way to continue.
Now, go out and help somebody!