Being your own boss promises lots of independence, but it also brings legal pitfalls and financial challenges unique to sole proprietors.
Setting up a small business as a sole proprietor is easy, but running it as one presents a big set of challenges. You’re in charge of everything, meaning that all the rewards are yours for the taking, but the same applies to the risks.
Let’s take a look at three of the biggest challenges of running your business as a sole proprietor.1. It’s Harder to Raise Capital & Establish Business Credit
Financing is the lifeblood of small business, and good business credit scores are the key to financing. Sole proprietors should be sure to obtain an employer identification number (EIN), register their business with state and local agencies, establish a separate business banking account, and obtain proper business licenses.
You can apply for a business credit card and start using that instead of your personal one, but you’ll still find that raising capital is an uphill battle. Investors are less likely to invest in sole proprietorships because of the lack of personal asset protection, and banks and lenders view sole proprietorships as less credible than formal businesses. If you die or become disabled, your business dies or becomes disabled with you.
Get your personal and business credit scores for FREE at Nav. Get started now with a free Nav account.2. You’re Legally Vulnerable
In the eyes of the law, a corporation or LLC is a separate entity from the folks who own and run it. If a corporation is sued, the plaintiffs can only go after assets controlled by the corporation itself.
As a sole proprietor, you are your company. If you run into legal problems or amass debt you can’t pay off, you’re personally liable. If worse comes to worst and your business goes under completely, you stand to lose valuable personal assets—including your house or other personal property.
Sole proprietors can protect themselves from some of these consequences by paying for general liability insurance and coverages that are specific to their industry, but this means more money coming directly out of your pocket at a time when you want to be investing everything you can directly into your business.3. It’s All You
While it may be nice to imagine a life with no boss to answer to, no coworkers to deal with, and no employees to account for, it’s easy to take for granted the advantages supplied by a built-in support system.
Your boss wants you to succeed, at the very least because it reflects well on him or her. Your coworkers, even the annoying ones, share the workload and provide competition and commiseration. Employees are a lot of responsibility, but managing a team forces you to build leadership skills and lets you divvy up mundane tasks so you can focus on building your company.
As a sole proprietor, you’re all on your lonesome. Marketing, accounting, customer service, product development—the buck stops with you. Friends and family might provide emotional support, mentors might offer encouragement and sound advice, but at the end of the day you’re a lone mechanic in charge of a complex machine.