Although there are lots of benefits of being a sole trader, it is an unincorporated business entity and there are several risks involved. Firstly, sole proprietors are personally liable for any debts the business produces. They cannot file for bankruptcy and depending on the amount of debt owed, may have to sell personal assets to settle overdue payments. Where sole proprietors put everything on the line, they may end up losing everything in a worst-case scenario.
Because investments are harder to secure under a sole proprietorship, there’s a danger that you may lose your own money in the long run where a business idea doesn’t take off. Alternatively, you may not be able to sustain your business if you cannot secure funding.
You can also be held accountable for any injuries you may cause during business operations. It’s best to purchase liability insurance if your business involves physical activities that could potentially harm yourself or others.
Starting a business is risky, no matter which legal structure you choose. If you want to test the waters with an idea that doesn’t require too much cash investment, sole proprietorships offer a good structure. Nevertheless, you should create a realistic business plan that assesses any competitors as well as your potential customers. Having an in-depth understanding of your potential customers will make it easier to weigh the risks and determine how likely you are to succeed. Whether you ultimately do succeed depends on your goals, your efforts and of course the market.