If you should check business and industrial statistics, you will observe that sole proprietorship kind of businesses dominates the list. In fact, sole proprietorship is the most preferred business entity utilized mostly by small business owners. Most entrepreneurs love the concept of their businesses being named after them. For example, take a look around your neighborhood and you will find businesses such as Martins’ Snacks, Cynthia’s Restaurant, Mr. Smith Gift shop, etc.
In an article I wrote previously, I highlighted the reasons why over 75% of businesses are operated under the sole proprietorship type of entity.
But in this article, I want to reveal the dark side of being a sole proprietor or operating a sole proprietorship kind of business because to every advantage, there’s a corresponding disadvantage. I personally dislike the sole proprietorship type of entity because operating under this business entity because it shows you lack business and financial intelligence.
I want to stress that I am not against the small business owners who operate under the sole proprietorship entity but the truth must be told. Smart, successful entrepreneurs hate running their business using the sole proprietorship form of entity for certain reasons which I am going to share with you. But still bear in mind that the final decision rests with you the entrepreneur; this article was written to guide you in your decision making and not to replace your judgment. So if you finally decide to stick with the sole proprietorship type of business entity; you will know it’s in your best interest.
Disadvantages of Doing Business as a Sole Proprietor
1. In a sole proprietorship kind of business, you are the sole owner. Your being in charge and being your own boss might make you believe you are building a business but in reality, you are building a job. And if you still claim to be building a business, I will tell you the bitter truth, you are not. Why? I will explain in the detail.
Can you leave your business and go on vacation for a year; and after a year, you will return to meet it growing bigger and stronger?
The true test of a business is in the answering of this question. What I mean in essence is that the answer to the question asked above will determine if you are building a business or a job. If your answer to the question above is yes, then you are building a business but it your answer is no; then you are building a job. If your answer to the question above is no; then I am sorry you don’t have a business because you are the business. If you take a leave or vacation for maybe five months, there will be no business left to return to.
To know if you are truly building a business, ask yourself this question. Can my business operate smoothly without my presence? If it can, then you are building a business but if not, you are the business. Period.
2. As the sole owner of a business, your business losses and liabilities are your personal loss and liability. The point I am trying to stress here is this; if eventually your business fails, your creditors can come after your personal assets. You will not only lose your capital invested but also your personal properties and assets.
If I am to state my own view here, I think it is insane and too risky to own a sole proprietorship kind of business. Entrepreneurs are known to be risk takers but not this type of risk. In fact, this is not risk, it is stupidity. Your business was created to protect you from financial hazard; not expose you to it.
3. Raising capital for a sole proprietorship business is extremely difficult. Everyday, I watch millions of young entrepreneurs and SME’s lamenting over poor funding and inability to raise capital. Most solely owned businesses operate without financial statements and banks don’t lend money without these documents. If the banks decide to lend money to you, you will have to put up your business and personal assets as collateral.
When young aspiring entrepreneurs seek advice from me with respect to raising capital; I encourage them to start with what they have, even if it means operating under a sole proprietorship type of entity and when they realized enough income to go for a limited liability company or a corporation, they should make the upgrade.
As a final note, I believe I can make more money and exercise more leverage using other form of entities such as limited liability, limited partnerships and corporation. Making money with other people’s money and pre-tax dollars is not much applicable to a one man’s business.
Besides; growth and expansion is limited when you are operating a solely owned business and the most dangerous part of it is this; operating a business using this type of entity make you a potential prey to attorneys and lawsuits.