As an entrepreneur, it’s a bit challenging to get things up and running amidst the chaos COVID-19 has done to businesses. Though the desire to launch the business quickly certainly makes sole proprietorship appealing, there are some risks that sole proprietors face which may not show up in the case of incorporation. Below outlined are the five common business risks sole proprietors are likely to face if you decide to forgo incorporation and operate as a sole proprietor.
- Increased Tax Rates
A sole proprietor is at risk for higher taxes and is subject to the marginal individual tax rate. But when you incorporate your business, you are actually entitled to only get taxed on the money you pay yourself as an employee. The flat corporate tax rate is much lower than your individual tax rate and as a result, incorporating the business wins the point.
As a sole proprietor, you’ll also have to pay self-employment tax that covers your Medicare and Social Security contributions. But as an employee of your own corporation, the corporation is responsible for paying half of these for you.
Also note that the sole proprietorships are more prone to be audited by the IRS than a corporation and many attest the fact that the experience was not pleasant.
- Personal Liabilities
If you have a history of Business debts and lawsuits as a sole proprietor, it could expose your personal assets. That means, if you operate as a sole proprietor, and you are sued,all your assets, your car, home,and personal bank accounts can get claimed by the creditors in all legal terms. In case of business incorporation, the business is completely separate from you and this limits creditors or claimants ability to take charge of your personal assets. - Failure to Raise capital
Investors want a secure investment and frequently want ownership in your business, in return to funding. Sole proprietorship has no legally established business, and it does not shed fair light in offering ownership. More likely, venture capitalists and angel investors don’t fund your ideas in absence of a legally established corporation-even in case of inexperienced investors.
- Inability to Secure Customers
Acquiring customers is a hard task while in sole proprietorship. While you may be successful to some extent through word-of-mouth marketing or family and friend connections, attracting new customers can be extremely challenging. As a sole proprietor, you mostly seem like marketing yourself while a corporation is a badge that shows you are serious about your business and is unique and legit. - Challenging Succession plans
In sole proprietorship, there isn’t a distinction between you and your business and in event of your passing or incapacitation, there isn’t a heir to your business. In other words, your business dies when you dies at least from a legal standpoint. But in case of incorporation, your business could be a separate entity and can be passed on to others.
Businesses today must not follow haste, as it may cause loss in the long run. While sole proprietorship could be exciting, a legal incorporation of your business may mitigate unnecessary exposure and prevent avoidable mistakes. In addition, it also protects your assets, limits legal exposure, gives legitimacy and credibility and allows succession planning.
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