Ways to Protect a Sole Proprietor From Being Sued

by John Cromwell

It is especially important for sole proprietors to avoid lawsuits because they are personally liable to pay for all of their business’s liabilities and claims. This means that they may have to pay for any business debt using their personal assets, not just the business's assets. There are two ways to protect a sole proprietor from being sued. The first is to ensure that the business does not participate in conduct that creates a high risk of a lawsuit. The second option is to protect the sole proprietor’s assets from a lawsuit.

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Retain an Attorney

An important first step for a sole proprietor to take to avoid lawsuits is to become aware of all of the laws and regulations relevant to his business. Therefore, a sole proprietor may want to place a local attorney on retainer. An attorney can be especially helpful to a sole proprietor as a preventative measure. Anytime the sole proprietor encounters an issue and is confused about the legality, he can contact his attorney, who could guide him to the correct legal path.

Employee Handbooks

While a sole proprietorship may sound as if it is composed of one person, it can have employees. If the business does have employees, a handbook can be a very useful tool to protect against lawsuits. The proprietor can minimize actions that would leave his business open to suit by clearly specifying his expectations, establishing the legal obligations that employees must abide by and defining the repercussions for failing to meet those standards. An employee handbook can also establish the employer’s legal obligations to his employees, which would help the sole proprietor avoid actions with employees that would leave him open to a lawsuit.

Draft Clear Contracts

Contracts can be an important tool for sole proprietors who wish to avoid being sued. By clearly defining the obligations of both sides of a transaction, both parties are more likely to fulfill their end of the bargain, which in turn diminishes the likelihood of a lawsuit. Depending on the sole proprietorship’s product and industry, a contract could be the same for everyone it does business with or specialized for each customer. The level of detail required for the contracts may also vary depending on how many issues there may be in relation to the transaction.

Alternative Organization

Converting a sole proprietorship to another type of business may not prevent a lawsuit against the business, but it can protect the sole proprietor’s personal assets if the company is sued. While a sole proprietor’s personal assets can be taken to satisfy the business’s debts, the personal assets of the owner of a corporation or limited liability company are not at risk. To form a corporation or LLC, a sole proprietor needs to file paperwork with the state where the business is located and pay annual fees.

Liability Insurance

Business insurance policies also do not prevent lawsuits, but can protect a sole proprietor’s personal assets from being taken as part of a legal award. When buying insurance, a sole proprietor should consider asking a lot of questions about what situations the insurance would cover. He should also consider common legal situations his business may face and make sure that the policy covers those circumstances as well.