6.02 – Going It Alone
Many businesses in the United States operate as sole proprietorships, where the owner is essentially the business. This means they are solely responsible for the business activities, enjoying all the profits and bearing all the losses.
Why do so many businesses start this way?
Sole proprietorships are popular because they are the easiest and least expensive way to form a business. If you use your name as the business name, all you need is a business license and some business cards to get started.
If you choose a different name for your business, the process is slightly more complex. For example, if you want to name your business ABC Associates, you need to apply for a DBA (Doing Business under an Assumed name) certificate. This can be done at your local government office and ensures that no two businesses in the same county have the same name.
Advantages of sole proprietorships
- Ease and cost: Sole proprietorships are the easiest and least expensive form of business organization.
- Control: The owner has complete control of the company, making all decisions and bearing all consequences.
- Tax benefits: The income from the business is yours, and you are taxed only once at your personal income tax rate.
Many professionals, such as consultants, authors, and home-based business owners, operate as sole proprietors due to these advantages.
Disadvantages of sole proprietorships
- Unlimited liability: As a sole proprietor, you have unlimited liability for any claims against the business. This means your personal assets—such as your home, car, and bank accounts—are at risk. It’s crucial to have business liability and errors and omissions insurance. If you produce a product, you’ll need product liability insurance, and if your company performs work for others (like construction), you may need bonding insurance. Consulting a good insurance broker is essential.
- Difficulty raising capital: Relying solely on your financial statement makes raising capital challenging. Investors are typically wary of investing in businesses that are indistinguishable from their owners.
- Lack of a diverse management team: Sole proprietorships often lack a management team with diverse skills to help grow the business. While you may have employees, it’s not the same as having a team of advisors. Forming an advisory board with individuals who possess the skills you need can help mitigate this disadvantage.
- Business continuity: The survival of the business depends entirely on you. If something happens to you or a catastrophe strikes, the business may not survive. Legally, if the sole proprietor dies, so does the business, unless its assets are willed to someone else.
If you plan to significantly grow your business, a sole proprietorship may not be the best long-term structure. It can be advantageous during the early stages of your business for income and control benefits, but consider transitioning to a different structure as your business grows.
