Ways to Protect a Sole Proprietor from Being Sued

By Stephanie Kurose, J.D.

Ways to Protect a Sole Proprietor from Being Sued

By Stephanie Kurose, J.D.

A sole proprietorship is one of the easiest ways to form a business. Its defining characteristic is that a single person has full control over its operation and maintenance. However, the downfall to being a sole proprietor is that it does not offer any personal liability protection, leaving you vulnerable to lawsuits. Thus, it is especially important to avoid lawsuits because a creditor may be able to reach your personal assets if your business assets cannot cover all of the liabilities and debts of the sole proprietorship.

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Sole Proprietorship Basics

A sole proprietorship is formed simply by conducting business. Unlike a corporation or a limited liability company, most states do not require registration of sole proprietorships. While the flexibility of sole proprietorships is a huge benefit, there are some disadvantages as well. As a sole proprietor, the courts and the government do not distinguish between your business and personal transactions. There is practically no legal distinction between you and your business. Thus, any claims or liabilities against the business are also liabilities against you personally.

There are a few ways to protect yourself against unlimited personal liability. First, the business should not engage in any conduct that creates a high risk of a lawsuit. Second, purchasing business liability insurance, while expensive, can prevent your personal assets from being reachable through a lawsuit. Lastly, there are some preventative measures a sole proprietor can take to help ensure he or she does not get sued in the first place.

Setting Clear Expectations for Employees

Nothing prevents a sole proprietor from having employees. However, the more employees you have, the more opportunities you create for someone to sue your business. Thus, it is imperative that you set clear expectations and obligations for your employees in order to minimize behavior that could leave your business vulnerable to lawsuits.

Consulting an Attorney

It is important that a sole proprietor is aware of and generally knowledgeable about all of their state's laws and regulations that are relevant to running a business. While you can do this on your own, you may want to work with a business attorney licensed in your state who knows the ins and outs of business compliance.

Similarly, an attorney can help draft any business contracts you enter into. Contracts are an important tool for sole proprietors, but they must be drafted correctly in order to avoid lawsuits down the road. If a contract is particularly detailed or complex, it may be best to consult a business attorney. However, if you would like to draft one on your own, make sure that all terms are clearly defined and all obligations clearly expressed so that all parties are able to fulfill their respective duties.

While a sole proprietorship is vulnerable to personal liability, there are ways to minimize that liability and avoid lawsuits. Follow these recommendations to best protect your business.

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.