Why Being a Sole Proprietor Can Hurt You in the Long Run

Starting a business is technically an easy thing to do. Generally, all you need is for someone to pay you for a product or service, and you are in business. Yes, I left out a few steps such as registering with the state or getting a sales tax license, but for the most part these are simple processes.

When you start out in business, unless you take the initiative to form a business entity such as a Corporation or an Limited Liability Company (LLC) you are deemed to be a sole proprietor. you don’t even need to get an Employer ID number (EIN) if you are not hiring employees, you can simply use your Social Security Number to file your taxes.

Here are the problems with taking such a route:

1. You have no legal shield. If someone sues your business, they are actually suing you personally.  This means as a sole proprietor the business assets and your assets (including bank accounts, property, etc) are all fair game to go after in a lawsuit. Operating under a legal entity provides a shield between your personal assets and the business assets.

2. You can’t get a business loan. If you apply for a business loan as a sole proprietor, you will end up applying for a loan that is personally guaranteed. This means the loan will be based on your personal credit and it will not allow you to build credit in the name of the business, which can be crucial should you decide to expand down the road. Many business owners don’t start out thinking of needed a loan and then when the time comes, they learn the hard way that they are not set up to get one.

3. Other companies or big clients may not take you seriously. It really does not require lot of money or effort to form a business entity and get an Employer ID Number from the IRS. In fact, the last one I did took 4 days, $86, and less than two hours of my time  – including driving the paper work to the Arizona Corporation Commission to file it (I do recommend getting professional help with this.)  If someone is going to partner with you or pay you lots of money, they want the reassurance that you are a “real business” and if you have not take these simple steps, you aren’t projecting the most professional image.

4. You’ll Have to “Re-Launch” Your Business. Once you decide to form a legal entity, you now will have to get a new bank account, and start to change over your accounts to the name of the new entity. From a business credit history standpoint, you will be starting over as of the day of the new entity.

5. You will likely pay more taxes. If you structure your business entity correctly, you will actually pay less taxes. Sadly, I learned this the hard way and the first year that my accountant restructured the business, I saved thousands on my taxes.

Let me close by saying, I am not a lawyer and I cannot advise you on how to set up your business legally. If you are a business owner and want access to a local lawyer who can answer all of your business questions as well as review documents for you to keep you out of trouble, I highly recommend getting a business legal plan with Legal Shield. This is something I can help you get. I have been a happy customer of theirs for over a decade and they have saved me thousands of dollars both personally and professionally.

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