Sole Proprietor Resources

The simplest form of business ownership, as far as logistics are concerned, is sole proprietorship, since you don’t actually have to establish your business as a separate entity from yourself. In a sole proprietorship, you are the business. However, this type of business structure doesn’t come without challenges, despite its simplicity. Getting loans, protecting personal credit and building business credit tend to not come easy to a sole proprietor. Learn more about this business structure and how to navigate its obstacles below.

What is a Sole Proprietor?

A sole proprietor is an individual who runs an unincorporated business. In a sole proprietorship, only one person is entitled to the company’s profits, but he/she is also responsible for the company’s debts. In a sole proprietorship, there is no distinction between the individual and the business, which makes it nearly impossible to build business credit or protect one’s personal credit from business debts or failures. There can be a great deal of risk for the individual, and finding ways to manage and reduce this risk can be crucial.

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Challenges for Sole Proprietors

Since there is no distinction between the individual and the business in a sole proprietorship, some institutions, like banks, may determine that it is too risky to offer loans, contracts, or more favorable terms and rates to the company. Sole proprietors may benefit from being able to get a personal loan with good personal credit, but are also challenged with protecting their personal credit and assets from the liabilities of their business, which inevitably become entwined with their personal liabilities. By finding ways to build business credit, a sole proprietor may help improve his/her chances of getting a loan or protecting his/her personal assets from loss or seizure.

Building Business Credit as a Sole Proprietor

Unfortunately, sole proprietors have to get creative when building business credit since there is no actual distinction between the individual and the business. One of the best options is to move away from sole proprietorship and incorporate your business and reduce your personal liability. Once you’ve done that, you’re not only personally safer, but you may have more options to build business credit. Other options include:

Establishing Your Business Credit File

The first step in actively building your business credit is to get a free D&B D-U-N-S® Number for your business. A D-U-N-S Number creates your company’s business credit profile, which other companies, like lenders, can purchase to assess your credibility and risk.

Use our free Company Update tool to get a free D&B D-U-N-S Number. Please note, this process can take up to 30 business days.

Trade Credit

Once you’ve been assigned a D-U-N-S Number, you can start to actively build your business credit. Encourage any vendors you may work with to send in trade credit** to Dun & Bradstreet for verification, or, with tools like CreditBuilder™, you can submit trade references yourself for Dun & Bradstreet’s acceptance and approval*. Submitting these payment experiences can help build your business credit and may impact your scores and ratings, which are what lenders will be looking at if they purchase your file. If right about now you’re thinking you don’t have time to build your business credit in addition to all you do as a business owner, don’t stress. With Credibility Concierge®, a dedicated Dun & Bradstreet advisor can help manage your business credit profile for you.

Beyond Sole Proprietorship

Incorporating

As stated above, a sole proprietorship really offers no personal protection against business debt collections. The same applies to a business that is organized as a partnership. Currently, the only designations that offer some personal liability protection are the Limited Liability Company (LLC) and a corporation.

Unless your business is of the rare variety that it does not need any external funding, and your products or services are not of the type that could cause an injury in any way, shape or form, then choosing a sole proprietorship or partnership for your business should be fine. But if your business requires funding or sells products, then you will probably need the added protection provided by either an LLC or corporation designation.

Paying Bills

Once you’re an LLC, start putting your company related bills under your company name to start building your business credit. Unlike other types of businesses, you may not ever have supplier contracts or business loans to pay back, but by simply paying your bills early or on time under your business name, you will build the company’s credit.

Managing Risk as a Sole Proprietor

When it comes to protecting your personal assets from the accumulated debt and other financial risks associated with your business, simply purchasing an insurance policy isn’t going to be enough. A sole proprietor is 100% exposed to the risks of his/her business because business and owner are considered a single entity. No insurance coverage in the world can change that.

As a result, which type of business structure you choose when building your business plays an important role in your level of personal risk exposure. Here are three things you can do to help keep your personal finances from your business risk.

It is important that you treat your business like a business. This means keeping your personal finances out of your business bank and credit card accounts. Don’t fall into the temptation of paying for a personal item using your business credit card, just because it has a larger limit than your personal cards. This applied to incorporated businesses as well.

Should your finances cross-contaminate, then you could find yourself in jeopardy of experiencing a financial conundrum that could impact your personal assets, regardless of your company being an LLC or a sole proprietorship

Now that you are a business owner, you have to act like one. This means being professional and responsible to all those around you. If you act negligently or attempt to commit fraud, then you could find yourself being personally liable for any damages, even if you choose to incorporate your business. These two business structures do offer personal liability protection, but there are exceptions, so being a reputable business owner should help you avoid such problems.
Insurance is important for a company to have, but it has to be the right type of insurance. For example, a professional practice is going to need a different type of coverage than a retail store, because they each have their own unique set of risks. Therefore, have a discussion with your insurance agent about which policies and coverages are best suited for your type of business. Make sure your business is adequately protected, but don’t get tricked into paying for coverage you don’t need.

LLC or Sole Proprietor?

Exceptions to LLC Protection

There are some exceptions to the protection leveraged by an LLC, in which the principle owner or owners can still be help personally liable. If you’re a sole proprietor considering forming an LLC, here are a few things to consider:

  • Personal negligence

    In the event that the LLC’s owner personally or directly injures another person, he/she will not be protected from any legal action initiated by the injured party.

  • Personal guarantees

    If the LLC’s owner signs a personal guarantee for a business loan, a business credit card, or any other kind of business debt, then he/she will be personally liable for the outstanding balances, should the company not be able to keep up its obligations.

  • Tax Issues

    It is the responsibility of the business owner to deposit any taxes withheld from their employees’ wages. If the withheld taxes are not deposited when required, then the business’s owner could find his/herself in trouble with the IRS.

  • Illegal acts

    If the LLC’s owner or owners are involved in any type of criminal activity or reckless or fraudulent behavior that causes harm to either the company or to another person or business, then they will be held personally liable for the crimes, and suffer the legal consequences.

  • Failing to treat the LLC as a separate entity

    When the owner of an LLC does not treat the company as a separate entity, as in using the company as an extension of his or her personal affairs, then the court could find that the LLC doesn’t actually exist, and that the owner and his or her company are one entity. Should this occur, the company can be stripped of its LLC designation, and the protection that comes along with it.

How to Ensure an LLC Remains a Separate Entity

There are four important things owners of LLCs should do to help ensure that the lines between their businesses and their personal affairs don’t become blurred. These include:

  1. Not concealing or misrepresenting certain material facts, or the state of the company’s finances to any outside party. In other words, the business should always act fairly and legally when dealing with vendors, suppliers, creditors, and any other outside entity.
  2. The LLC should be adequately funded so it can meet any foreseeable expenses and liabilities.
  3. The LLC should have its own Federal Employment Identification Number and a business checking account that is used for business expenses only. Personal credit and business credit should never blend, and personal purchases should never be made using business funds.

Be sure to create and keep an LLC Operating Agreement on hand. This document identifies the company’s principle owners, their responsibilities, their percentage of ownership, a profit and loss dispersal breakdown, and the steps that should be taken should one of the owners leave the company.

Using Business Credit to Manage Risk

If you do decide to incorporate your businesses, your business credit file can help you manage risk as well. Business credit monitoring can help prevent fraud, and always knowing what’s happening with your scores and ratings can help you make better decisions that can positively impact your file. Monitor changes to your scores and ratings for free with CreditSignal™ so you’re never in the dark about your business credit.

Photo Credit: criene, Twenty20