Starting a small business is the dream of many – but a lot of people underestimate just how hard it is to finance a new enterprise on their own dime.
They need loans, investors and other financial resources to establish, build and grow their entrepreneurial dreams. That means structuring the business around those goals.
Simplicity comes with limitations
Sole proprietorships are the simplest and most common business structure for solo entrepreneurs, but you and the business become legally indistinct when this is the route you take. Lenders and investors often hesitate to put their money into sole proprietorships for several reasons:
- Personal liability: When your business is a sole proprietorship, it’s legally indistinct from you. Not only can you be held liable for your company’s debts, but your business can easily end up in financial trouble because of your personal debts. If you cause a car accident, for example, the victim could go after your business assets.
- Limited potential: Sole proprietorships generally have a hard time “scaling up” because their success is tied to the owner’s personal capacity and efforts. There’s no easy way to bring in partners and you can’t offer equity shares. This limited potential for growth and inability to offer ownership stakes can make it harder to attract any kind of investor because there’s less potential return for their money.
- Questions of continuity: Lenders are also hesitant to offer long-term loans to a business that might not exist in the future. In essence, they’re looking for companies that have a clear succession plan and won’t disappear when the current owner retires or dies.
A lot of small business owners only think about getting legal guidance when they’re already in a dispute. However, getting legal help at the very beginning can help you position your fledgling enterprise in the best possible spot to obtain financing.