Small Businesses Disadvantages

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DISADVANTAGES OF SMALL BUSINESSES
FAZAL ALEEM KHAN

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. 1. Another Tax Return

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. 3. No Personal Tax Credits

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.

4. Less Tax Flexibility

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.

5. Liability May Not Be As Limited As You Think

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.

6. Registering A Corporation is Expensive

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. Death, withdrawal; or bankruptcy of one palrtner. Difficulty in dissolving partnership. Debt of one partner becomes the debt of all partners. Growth inhibited by size of partnership. No clear line of authority.

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.
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The fear of the service provider ceasing to trade (bankruptcy, etc) You may lose control of the process Creates potential redundancies Other companies may also be using the service provider. Therefore in some cases, the best interests of the service provider may be diluted with other users You may lose focus of the customer and concentrate on the product (the outsourced process) The loss of talent generated internally

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Employees may react badly to outsourcing and consequently their quality of work may suffer Many of the disadvantages can be avoided if you research the service provider and you do not regard outsourcing simply as a money saving scheme ± this is not always the case. 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:
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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. Specific disadvantages are:

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company income is your income - no tax minimization; you're responsible and liable for company activities, even if you didn't carry out the activity; companies prefer doing business with other companies. 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:

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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 incorporation is relatively costly and time-consuming; most jurisdictions have annual filing, record-keeping and fee requirements; 3. Partnership The partnership is a separate entity like a company. Specific advantages are:

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you can own a business together with others; you can share the work and responsibilities with your partners. complicated to set up and run; dissolving a partnership is difficult; it doesn't automatically limit your liability; it doesn't automatically let you minimize your taxes. 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

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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
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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

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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

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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.

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