According to the Small Business Administration (SBA) 70% of all businesses in the United States are Sole Proprietorships. The vast majority of these small business owners choose Sole Proprietorship for the simple reason that they’re extremely easy to setup: they require minimal paperwork, offer complete autonomy when making business decisions, and enjoy low tax rates and easy tax filing. Also, business losses can be offset by money from other income streams, like a spouse’s earnings or a second job.

 

But because a sole proprietorship is an unincorporated business, it comes with several disadvantages: the potential for unlimited liabilities, the inability to partner up with someone else, and the connotation of being “less professional” than an incorporated business.

 

Because it’s usually much trickier for sole proprietors to secure a small business loan, it can be hard for them to scale their businesses. Growth demands a timely infusion of capital, but with few or no assets, investors or banks are more hesitant to approve an application for a business loan.

 

 

Sole proprietors, by the very nature of their businesses, are the face of their company. (Quite literally, in some cases, like with freelance writers or other independent contractors). Financial lenders see sole proprietors as too risky because there’s no hard separation between business and personal finances and, therefore, they can be held personally responsible for any business debts or other business liabilities.

 

For some sole proprietors, funding their business directly from their own savings or personal assets is the only option available. Without personal funding, there wouldn’t be a business to operate. This option also means that there’s no need to justify a business plan or convince a bank that you’re an acceptable credit risk.

 

Unfortunately, while self-financing can offer sole proprietors flexibility and speed, it often proves to be a stumbling block when the need for outside capital almost inevitably arises. Sole proprietorships generally find it difficult to qualify for a bank loan because they’re not seen as “credible” enough. And as a sole proprietor, your business could easily go under if you’re called out for jury duty, get severely sick, or have to deal with a pressing emergency. That’s a big risk for any lender to make. Another popular funding mechanism available to businesses—the sale of an equity stake—is essentially closed off to sole proprietors. Investors willing to commit significant resources to a growing enterprise generally want to own a portion of the company in return for their financial investment. Sole proprietorships can’t take on new owners without losing the “sole” designation, so in the event of a new equity investment, a sole proprietorship would need to evolve into a general partnership or some form of corporation. *** A sole proprietorship has plenty of benefits, but many of the features that make this type of business entity so appealing to business owners can also work against them. That doesn’t mean, though, that outside funding isn’t an option if you’re a sole proprietor seeking to expand. By exploring all available options, including non-traditional funding sources, sole proprietors can usually secure the capital they need to take their business to the next level.