As an entrepreneur you will want to get your business up and running as soon as possible. The desire to launch fast makes sole proprietorship appealing. All you need to do is start conducting business but there are some significant risks you face. Today we are discussing five common sole proprietor business risks you can take on if you decide to operate your business as a sole proprietor.
Increased Tax Rates
When you are a sole proprietor, you are at a risk for higher rates. Without a corporation, the income you have is subject to the marginal individual tax rate. When you are incorporated, you are only taxed on the money you pay yourself as an employee. This is important because the flat corporate tax rate might be lower than your individual tax rate.
Another note to remember is that you are responsible for paying self-employment tax as a sole proprietor. This tax covers your Medicare and Social Security contributions, which you are responsible for paying for as a sole proprietor. As an employee of your own corporation, the corporation pays half of these to you.
Additionally, consider that a sole proprietorship is more likely to be audited by the IRS than a corporation.
Unlimited Personal Liability
Business debts and lawsuits filed against you as a sole proprietor expose your personal assets. For example, if you are sued as a sole proprietor then your car, home and bank accounts are fair game for creditors. When your business is incorporated, the business is a legal entity completely separate from you.
Failure to Raise Capital
One of the factors that investors care about is that their investment is secure. Investors require ownership in your business in exchange for funding. As a sole proprietor, there is no legally established business which makes it impossible for you to offer ownership. Venture capitalists and angel investors are unlikely to help fund your ideas without a legally established corporation.
Inability to Secure Customers
You need to be able to attract new customers and it can be challenging as a sole proprietor because they do not know who you are and do not have a connection with you. It is possible to secure customers through word-of-mouth marketing and advertising, and through friends and family connections as well.
Challenging Succession Plans
As a sole proprietor, if you happen to pass away, your business also dies. When you are incorporated, your business is separate entity from you and may be passed onto another in keeping with your wishes.
When it comes to launching a business today, it is important that you legally incorporate your business as soon as possible in order to reduce unnecessary exposure and prevent avoidable mistakes.
The Bottom Line
When you incorporate your business, you protect your personal property, your legal exposure is limited, and helps give your business legitimacy and credibility.