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Small Businesses Disadvantages
Small Businesses Disadvantages
While there are several advantages to incorporating a small business, there are also disadvantages that
need to be considered. The main disadvantages of incorporating, I think, are the increases in paperwork
and cost, which can be substantial compared to a sole proprietorship or partnership.
When you incorporate your small business, you'll have to file two tax returns each year, one for your
personal income, and one for the corporation. This, of course, will mean increased accounting fees.
Unlike a sole proprietorship or partnership, corporate losses can't be deducted from the personal income
of the owner.
2. Increased Paperwork
There is a lot more paperwork involved in maintaining a corporation than a sole proprietorship or
partnership. Corporations, for example, must maintain a minute book, containing the corporate bylaws
and minutes from corporate meetings. Other corporate documents, that must be kept up to date at all
times, include the register of directors, the share register, and the transfer register.
Another disadvantage of incorporating is that being incorporated may actually be a tax disadvantage for
your business. Corporations are not eligible for personal tax credits. Every dollar a corporation earned is
taxed. As a sole proprietor, you may be able to claim tax credits a corporation could not.
A corporation doesn't have the same flexibility in handling business losses as a sole proprietorship or a
partnership. As a sole proprietor, if your business experiences operating losses, you could use these to
reduce other types of personal income in the year the losses occur. See "8 Tax strategies to Maximize
Your Business Tax Deductions". In a corporation, however, these losses can only be carried forward or
back to reduce the corporation's income from other years.
The prime advantage of incorporating, limited liability, may be undercut by personal guarantees and/or
credit agreements. The corporation's much vaunted limited liability is irrelevant if no one will give the
corporation credit. When a corporation has what lending institutions consider to be insufficient assets to
secure a loan, they often insist on personal guarantees from the business owner(s). So although
technically the corporation has limited liability, the owner still ends up being personally liable if the
corporation can't meet its repayment obligations.
A further disadvantage of incorporating is that corporations are more expensive to set up. A corporation is
a more complex legal structure than a sole proprietorship or partnership, so it's logical that creating one
would be more complicated and costly. Fees for incorporating a small business either provincially or
federally range in the hundreds of dollars - and that's just for the set up. I've already mentioned the
increased maintenance and related fees, such as increased accounting costs.
Should you incorporate your small business? I've outlined the advantages and disadvantages of
incorporating in this article, and you can find more information about how to incorporate your business in
my Incorporating A Business library of links, but I strongly recommend that you discuss your personal
situation with your accountant and lawyer before you decide. He or she will be able to give you a much
more exact picture of how incorporation could benefit your business, and help you see whether or not the
trouble and expense of incorporation will be worth it to you.
The disadvantages of small business loans are numerous and will apply often in the short, medium and
longer terms. It is always wise for a small business to avoid taking a loan which it will have to service in
addition to its existing outgoings but as there are occasions where it will be unavoidable, the only way the
small business can minimise the risk is to be aware what to watch out for.
There are lean times for most small businesses when they will often find themselves short of necessary
capital to service the running of the business. This is when the disadvantages of small business loans are
most prominent. The small business owner may see the loan as a means of getting through the tough
times and on to brighter pastures ahead but what they have to take in to account is the fact that they will
have to make the loan repayments each month as well as their existing outlays. This could mean even
bigger trouble ahead if the loan will run out prior to the business turning the corner and the small business
owner should think very carefully in this respect before taking out a small business loan.
It may be the case that the small business is in need of new equipment to either continue to run or to
expand the business. If the equipment is necessary, the small business owner may not have an option but
if it is with a view to expansion, the small business owner should question whether the additional income
will justify the cost of the loan in the short term. It may well be more cost effective in the long term to
simply save the money towards the cost of the new equipment.
The disadvantages of small business loans also have to include quite specifically the sometimes
prohibitive cost of them. The interest rates applied can be very high and in some instances, there will be
an arrangement fee charged on the loan. Where this arrangement fee is added to the capital of the loan, it
will also incur interest, increasing the cost even further.
It would be advisable therefore for any small business taking out a loan to shop around for same very
carefully. They should investigate all their options before signing any agreement and ensure that they get
the best deal possible, even where this perhaps involves taking their business away from their traditional
bank.
The disadvantages of small business loans can in theory be so profound that they signal the end of the
business altogether. They should therefore never be entered in to lightly and proper calculation as to their
repayment and features should always be made in advance.
Consequently, you should be certain that you have a valid reason for outsourcing and that you intend to
liaise regularly with the service provider to avoid loosing all control of the process.
However, the disadvantages are valid reasons why not to outsource – it is therefore a common case of
weighing up the pros and the cons for your particular situation.
No control
You can't control an independent representative. They will only push those products they feel have the
best chance of selling and making them money. They will tend to put their best effort into selling the best
products from their most established lines.
No commitment
As a new manufacturer you are an easy target for the "first time out of the bag syndrome." The
representative will be looking to place orders for your product very quickly after he or she first introduces
it. If that doesn't happen, your product might well not be presented again. Of course, unless you have an
agreement to the contrary, which would be unusual in this business, the independent representative you
are using may very well be selling your competitor's products, too!
You should keep in mind that even if you have an established, long-term relationship with a
representative, you must constantly "sell" them on the potential of both your existing and new products or
services.
Competing products
Unless you have an agreement to the contrary, an independent sales representative may take on a
competing line or a line that competes with your products.
The three types of business structure each carry with them inherent advantages and disadvantages for a
new small business. While your choice doesn't have to be final, changing the type of business structure
often involves additional expense and possibly a change of name. A new small business doesn't need this
kind of complication so we'll look at what each type is designed to do and how well it accomplishes its
aims. It will then be easier to make an informed decision.
1. Registered Business
The registered business is the least complicated to set up and imposes no requirements on the individual
who wants to start a business. You may want to register a business name and open up separate bank
accounts for your business but you don't have to. Specific advantages are:
low cost to set up;
can be done quickly and easily;
few formalities and documentation requirements;
little extra accounting required;
few additional tax forms;
flexibility as to what the company does.
2. Company
The incorporated business is a completely separate entity from the business owner. It has it's own bank
account, pays its own taxes and can easily be sold. Specific advantages are:
you're not responsible or liable for the company's activities if you didn't take part;
you can arrange your own and the company's finances so that taxes are minimized;
companies are regarded as more permanent and stable by other companies
3. Partnership
All three are viable business types and all three will work as a small business. For your particular case,
one is going to be the best for the first few years of your business and what you choose will have an
impact on how your business develops.
Attracting Talent
A larger company tends to have greater resources to offer top talent within your industry, and
those resources are often used to attract that top talent. In order to grow your business you need qualified
people in key positions. A larger business can offer more advancement, a more recognizable name that
could help in the execution of work duties and potentially more pay and benefits than a small business. A
small business would need to use the potential for growth as a way to attract top talent, and that may not
be enough to get the people your company needs to become successful.
Name Recognition
When a small company is out in the marketplace trying to win business, it is inevitable that it will
come across some of its larger competitors. A larger business has a level of name recognition that a
smaller business does not have. To some potential clients, there is a sense of confidence in doing business
with a company that has an established name within the industry as opposed to going with a relatively
unknown small business.
Raising Funds
A small business owner is constantly looking for sources of funding for the business. While the
federal government offers opportunities for grants to small business, private investors may not be as
willing to give access to funding. A small business that does not have the market share or presence in the
marketplace that a larger business has may find it difficult to convince venture capitalists and other
private investors to put money into the business and help with growth. Even banks may make lending
difficult for a small business by offering higher interest rates on loans than they would offer to a larger
business.
Downturns in Revenue
When a larger company experiences a downturn in revenue, it may have enough reserve cash on
hand to survive the downturn. The reputation of the larger business may allow it to negotiate terms with
vendors that would help to stretch revenue until sales pick up again. A small business operates on a
tighter budget and a large downturn in sales could mean the end of that small business if reserves are not
available or a line of credit is not offered by a lender.