The Top Ten Risks in a Sole Proprietorship
When you run your own business, one of the biggest challenges is that you don’t have an established company you can fall back on in times of need. All the headaches and all the rewards are yours alone. Running a solo enterprise is not for the weak at heart, because there are a number of other inherent risks in taking it on yourself.
As a sole proprietor, you won’t get a paycheck if you don’t work. You must maintain a steady stream of clientele to keep you working. If you become ill or lose a major client, for example, you may experience periods of little or no income.
Lenders look at your personal finances when deciding whether to extend you credit as a sole proprietor. Personal spending habits affect your ability to get credit, so you’ve got to maintain a stellar credit rating.
One of the benefits of incorporating your business is that it provides a layer of protection between you and any losses your company may encounter. If for example, you get sued for any reason, you could lose all your personal property in addition to your business holdings.
When you are a sole proprietor, you limit the number of opportunities you could garner when you bring on partners or rely on a larger corporate structure. You also limit the number of contacts, business experience and investments that others bring to the table.
There’s only 24 hours in a day and only one of you. You need to rest and eat, so you’re limited in the amount of work you can do. Even if you hire outside contractors to help, the bulk of the lifting rests on you. Without the expanded operations you gain from bringing on partners or incorporating and hiring experienced staff, your earnings are limited to what you can accomplish each day.
While you’re busy doing your work, you’ve got to carefully monitor your finances. One of the most common risks sole proprietors take on is keeping their own books, so either get an accountant or get in the habit of posting your earnings and expenditures in a daily spreadsheet or log.
A professional office and staff give your company an air of credibility, especially when you’re providing businesses with goods or services. You risk looking amateurish if you don’t at least have letterhead, business cards and an updated website, especially if you operate out of your home.
You’ve got to read the fine print in any insurance policies you use to cover your business. Some insurance companies may try and claim that your policy doesn't cover personal items, which is what you use to run your business. You may purchase liability coverage for accidents that occur while doing business, for example, but the equipment involved in an accident may not be covered under your business policy.
After years of hard work in your business, there often is little to pass on if you maintain your company as a sole proprietor. When you die, the business may die as well, unless you’ve trained someone willing to take it over under the same terms. When you die, the business becomes a part of your personal estate and it’s up to your heirs to decide what to do with any equipment or property associated with the company.
While you can deduct most all of the expenses related to your business on your income tax, you must pay self-employment taxes that could increase your tax burden if you don’t claim sufficient deductions to offset the costs.