What’s your entrepreneurial story? Maybe you simply loved doing something so much that one day you started a company, even with no business background. That’s a wonderful way to dive into entrepreneurship, but I want to make sure that you’re protected as a small business owner.
So now let me ask you: what business structure do you operate your company under? If you’re scratching your head and don’t have a clue what I’m talking about, you probably operate as a sole proprietor. That simply means you didn’t designate any specific business entity like a corporation or an LLC, and that you and the business are essentially the same.
So, what are the risks of being a sole proprietorship?
There’s nothing wrong with being a sole proprietor, really, but it does put you at certain risks that you should be aware of.
Your personal assets aren’t protected
When I say you and the business are essentially the same, what I mean is that the court (and anyone you owe money) will see your personal bank account as accessible as your business’s bank account if you ever get sued or owe a substantial amount of money. So if you owe $20,000 and don’t have it in your business bank account, guess where they look next? Yep, your own personal checking and savings. And if you don’t have it there, they can legally seize your personal assets.
Now, I don’t know about you, but I’ve worked hard for my assets, and I don’t want to put them in jeopardy. That’s where choosing a business structure like an S Corp or LLC can come in handy.
You’re less attractive as an investment
If you want to find investors who will inject funding into your company, you might find it hard to do so if you remain a sole proprietor. Just like your assets can be seized in the event of a lawsuit, so can those of anyone who invests in your company if it’s a sole proprietorship. So investors tend to only work with incorporated companies simply to protect themselves and their own assets.
Filing as a corporation, on the other hand, can open you up to a whole world of funding you don’t currently have access to.
Your business life is short
The thing about a sole proprietorship is that when you die or want to be done running the business, the business entity dies as well. So if you have a plan to hand your business down through future generations, you won’t be able to do that easily with a sole proprietorship.
You can, however, pass a corporation or LLC down, since they live on indefinitely. And isn’t it nice to think that your business will outlive you?
It’s important as a business owner to understand the risks you face every day. Why add more risks to your list simply by not taking the step to form a corporation or an LLC? It’s a simple process, and one that you’ll be glad of for years to come.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Also published on Medium.