Sole Proprietorship and Lawsuits

By Maggie Lourdes

A sole proprietorship is a business operated by one individual, often under the person's own name. This is a common and popular legal structure for small business owners because it is simple to start. You can begin a sole proprietorship without any formal documentation or state filings. The major disadvantage of a sole proprietorship is personal liability – a sole proprietor's personal assets are not protected from debts or lawsuits arising from the company's operations.

Sole Proprietors and Personal Liability

When a sole proprietorship is sued, the owner is personally named as a defendant in the lawsuit. Corporations and limited liability companies don't expose owners to this risk because they're treated as separate legal entities; this is why the owners of corporations and LLCs are not usually named in company lawsuits, and their personal assets aren't at risk. Some exceptions to this rule apply. For example, if the owner of a corporation commits fraud while engaging in company business, he may expose himself to personal liability.

Judgments and Sole Proprietors

A judgment is a court order that compels a defendant to pay money in a lawsuit. If a sole proprietor refuses or is unable to pay a judgment, the court can authorize a sheriff to seize the defendant's business and personal property. The court can also issue garnishments to freeze business and personal bank accounts and other assets. The resulting money is then paid to the judgment holder if no objections are filed in court within the time prescribed by state law.

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Personal Credit and Income

The income and debts of a sole proprietorship are legally regarded as the owner's personal income and debts. Therefore, it is important for a sole proprietor to pay business debts on time to avoid adverse effects on personal credit scores. A sole proprietor's business income is reported on Schedule C of his Form 1040 personal tax return. This differs from a corporation or LLC, which files business income tax returns.

DBAs and Sole Proprietorships

A sole proprietorship is often operated under a fictitious business name or DBA (short for "doing business as") rather than the owner's personal name. The owner must register the DBA in accordance with applicable state law. A DBA does not protect a sole proprietor from personal liability; both the business operating under its fictitious name and the owner may be sued for damages arising from the company's products, services or other liabilities.

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Characteristics of a Limited Liability Company

The limited liability company, or LLC, is a popular business entity type among entrepreneurs and small business owners because of its liability protection and flexibility both in terms of tax treatment and operation. While the laws governing LLCs are set forth in statutes that vary from state to state, there are several common characteristics that apply in all jurisdictions.

What Does LLC Mean for a Company?

First authorized by laws passed in Wyoming in 1977, the limited liability company, or LLC, is a fairly recent development in the business world. The LLC structure allows business owners to organize a firm that protects them from personal liability for debts and other financial obligations should the business fail. It is a useful structure for small businesses that want the advantages of a basic partnership without the obligations attached to forming a corporation.

Difference Between an Individual & a DBA

An individual may operate an unincorporated business as a sole proprietor either under her own name or an assumed trade name, which is called a DBA or "doing business as" name. Business partnerships and corporations may also choose to conduct business under a fictitious DBA name to distinguish their business from others or build the basis for a better marketing platform.

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