Disadvantages of a Sole Proprietorship
The biggest downside of a sole proprietorship is the owner's personal liability for business-related debts. For example, if you go out of business and still have some unpaid business debts, your business creditors can go after your personal assets to get what's due them.
If someone gets injured on your business premises and sues, unless you have sufficient liability insurance, your business and personal assets are all up for grabs.
Hard to Raise Capital
Your ability to raise additional capital may be limited. For example, once you tap the funds of family and friends, other sources of funds may not be so quick to fork over the money you may need for working capital or expansion.
Working Capital is the excess of current assets over current liabilities.
- Current assets include cash and other assets that can be turned into cash within one year (e.g., accounts receivable, short-term investments, and inventory).
- Current liabilities are liabilities payable within one year.
Conservative lending institutions, like banks, view business loans to self-employed small business owners as high risk. They prefer to make safer loans, like home equity loans for home improvements for example.
No Continuity of Life
When a sole proprietor dies or sells the business, the business ceases to exist. In contrast, when a stockholder of a corporation dies or sells his stock, the business still exists and continues to operate as usual.
- Return to the Tax Basics for Startups Table of Contents to find related links.