While becoming a sole proprietor can offer numerous benefits to a business owner – you get to be your own boss and have total control of the operation – are a variety of challenges that can serve as an impediment to business success. If you're considering starting your own business as a sole proprietor, your first job should be to study the risks and responsibilities involved.
Some sole proprietors may work out of a garage or the basement of their home when starting out. If your business is one that depends on customers coming to you, you may not be taken as seriously as someone who operates out of a storefront or office. This lack of professional appearance may cause potential customers to do business elsewhere.
One of the major challenges of sole proprietorship is that your personal assets may be at risk. Unlike a company, which has limited liability for the business debts, a sole proprietor has unlimited liability. This means that creditors may be able to take possession of your home, car or other personal property if you default on business loans or can't make payments on your business credit cards. You're also likely to need to purchase liability insurance to protect against damages or injuries to other parties.
As a sole proprietor, you may have more difficulty raising needed capital or obtaining business loans. You can't raise capital by selling stock like a corporation, and lending institutions will be less likely to give you a loan since your assets may be limited. You may have to resort to mortgaging your home or selling other assets to raise working capital.
Sole proprietors bear the burden of making all the decisions of the business. If they are inexperienced business operators and do not have access to a mentor or other more experienced business owner, they could easily make incorrect decisions. They also must wear several hats, performing a variety of functions like marketing, accounting and clerical work all at one time.
One of the lesser-known risks associated with sole proprietorship is the draw on your personal time. A sole proprietor may find it challenging to step away for a needed rest or vacation since there is no one else to operate the business in her absence. If the business is struggling to earn a profit, even one or two missed days could cause a serious hardship. The proprietor may also be forced to work through periods of poor health to avoid losing income.