Ways to Protect From Liability in a Sole Proprietorship

By Jeff Franco J.D./M.A./M.B.A.

When you choose to run your business as a sole proprietorship rather than creating a separate entity for it, the principal disadvantage is that you’re personally liable for all debts you incur through the business. This is because state governments and the IRS don’t consider your business activities as being separate from your personal transactions. However, there are ways to protect yourself from liability.

When you choose to run your business as a sole proprietorship rather than creating a separate entity for it, the principal disadvantage is that you’re personally liable for all debts you incur through the business. This is because state governments and the IRS don’t consider your business activities as being separate from your personal transactions. However, there are ways to protect yourself from liability.

Protecting Your Home

Since it’s common for a person’s home to be his most valuable asset, it’s likely to be the first personal asset you want to protect as a sole proprietor. If you are married, protecting your home can be as simple as changing the title so that you and your spouse own it as tenants by the entirety. This type of ownership implies that you and your spouse each have a property interest in the entire home rather than 50 percent each. This is effective because business creditors cannot place a lien on the home if the debts you owe through the sole proprietorship don’t relate to your spouse. And even if you’re not married, you may be able to own the home with someone other than your spouse, but this always depends on the laws of your state.

Ready to start your LLC? Start an LLC Online Now

Obtain Insurance

The last thing you want is for a lawsuit to bankrupt your business and deplete your personal assets. One way to eliminate this risk is by obtaining business liability insurance policy. This is an expensive option, but it can protect you from events that may be financially devastating and put you out of business. The amount of insurance coverage necessary will depend on the type of business you operate. For example, if you work in the construction industry, one little mistake can be rather costly if you are sued. In this case, choosing a policy that provides sufficient coverage is critical since you’re still personally liable for any lawsuit judgment that exceeds the amount that your insurance company will pay on your behalf. But if your sole proprietorship provides services, such as interior design consulting, a much smaller amount of insurance coverage is usually sufficient.

Hire Contractors

Since a sole proprietor is generally not responsible for the negligent acts of an independent contractor, you should attempt to use contractors rather than employees for all of your staffing needs. However, one thing of which you should be aware is that each state has different laws regarding your personal liability for the negligence of contractors. In California, for example, a sole proprietor is not responsible for a contractor’s negligence unless the job for which he hires the contractor is inherently dangerous.

Create an LLC

The most effective and inexpensive way to protect yourself from liability is to change your sole proprietorship into a limited liability company, or LLC. A LLC provides the best of both worlds. By filing a simple formation document with your state, you can separate your business and personal debts, which means that your business creditors are unable to go after your personal assets to satisfy debts and judgments of the business. However, for tax purposes, as a single- member LLC, you can continue to file your taxes as a sole proprietor.

Ready to start your LLC? Start an LLC Online Now
Sole Proprietorships With Independent Contractors

References

Related articles

Things to Consider in Self Employment

If you're considering making a transition from the 9-to-5 world to becoming self-employed, you may wonder what considerations you should make. You may very well need to secure financing to make your business a reality. You will also need to consider factors such as how you'll handle your taxes and secure insurance -- and even how you'll structure your new business.

How to Start a Company As a Sole Proprietor in Georgia

Sole proprietorship is the least regulated form of business in Georgia -- although you're personally liable for any problems that arise from your business. All it takes to get started legally is registering a unique name, obtaining any required licenses and insurance and registering to pay taxes. In Georgia, the Secretary of State's office manages and administers matters of business formation.

What Is Bad About Proprietorship?

A sole proprietorship refers to a business owned and operated by one person who hasn't made a legal entity selection and filed with the state such as a corporation or limited liability company. Although a sole proprietorship is the easiest and least expensive type of business entity to set up and run, it does have a number of drawbacks not present with other entity choices.

LLCs, Corporations, Patents, Attorney Help

Related articles

Can I Open an LLC in California as a Sole Proprietor?

In California, you can operate your business either as a sole proprietorship or as a limited liability company, but ...

What Do You Need to File as a Sole Proprietor?

For entrepreneurs who want to operate a business without a legal entity, they can do so and operate as a sole ...

Why Create an LLC for a Rental Residence?

Many small business owners choose to organize their businesses as limited liability companies (LLCs). The LLC form ...

Risks When Starting a Business

Starting your own business can be a very attractive option, but one that carries significant risks. Some of these risks ...

Browse by category