Sole Proprietorship and Lawsuits

By Jeffry Olson, J.D.

Sole Proprietorship and Lawsuits

By Jeffry Olson, J.D.

Selecting a type of business entity is one of the earliest decisions a business owner makes. A sole proprietorship is the most common form, likely because it's the default form of business that exists when an individual opens a business without any further legal formalities. A sole proprietorship often operates under the name of the owner or a “doing business as" (DBA).

Man in suit smiling with tablet

Selecting a form of business has consequences, as each is subject to different laws and expectations. When a company is a defendant in a lawsuit, each type of entity has different options and responsibilities. When a sole proprietorship is a defendant in a lawsuit, characteristics that were once convenient could work against the owner. Before you allow your business to become a sole proprietorship by default, make sure you know exactly what that means.

Personal Liability

The primary disadvantage of a sole proprietorship is its lack of liability protection. A typical lawsuit against a sole proprietorship names the owner as a defendant. This is not the case when the business is a corporation or limited liability company (LLC) because the owners of a corporation or LLC have protection from personal liability.

All creditors of the sole proprietorship are also creditors of the owner of the business, and the creditors can seize the owner's assets because of debts and judgments against the sole proprietorship. Further, debts of the business impact the owner's personal credit. A sole proprietorship provides owners no legal protection for liability from creditors.

DBAs Offer No Additional Protection

If a sole proprietor conducts business under a fictitious business name, the owner must file a “doing business as" with the appropriate jurisdiction, typically the county or state in which the business operates. Operating under a DBA still does not provide liability protection for the sole proprietor. The only benefit of a DBA is that it allows the business to operate under a name different from that of the owner.

A sole proprietorship is easy to set up and operate. It requires no filing with the Secretary of State or other agency and calls for no ongoing paperwork, such as operating agreements and minutes of board meetings. Further, the owner receives the benefit of pass-through taxation. However, these benefits come with a cost. A sole proprietorship provides no liability protection for the owner. The owner is responsible for all liabilities of the business, including judgments. A business operator must consider the advantages and disadvantages of a sole proprietorship when selecting a form of business.

Lawsuits may be an unfortunate reality for any type of business owner, including owners of a sole proprietorship. Having an understanding of the types of protection available can help ease the potential consequences of a lawsuit or debts. If a business owner or operator is unsure of the legal protections provided for their type of business, consulting an attorney may also be of use.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.