Liability issues are of particular concern for sole proprietors because the owner is personally liable for claims against the business. Unlike an LLC or corporation, if a sole proprietorship loses a lawsuit or otherwise finds itself in debt, not only will the business be liable for the debt, but the owner/sole proprietor will be as well.
One of the first steps in reducing your liability risks is to recognize where you are vulnerable. Most claims arise from predictable — and often preventable — situations. Some of the most typical risks faced by small businesses are outlined below.
The most likely kind of claim or lawsuit that could be brought by or against your business will be over a contract or agreement of some sort. When someone violates (or is accused of violating) a contract —whether written or oral — the dispute might lead to a lawsuit. Problems like these are called "contract" claims, because they stem from contractual agreements.
A less likely but extremely serious risk can also arise when someone in or around your business gets injured — financially or personally — by some act not related to a contract. For example, if one of your employees injures someone by being negligent, the business may be liable. A lot of your risk management efforts will be directed at preventing these kinds of claims — called "torts" in legalese — because they can be very costly to you and your business.
Being a sole proprietorship removes one major area of potential liability: lawsuits from co-owners. But other parties pose potential lawsuit risks, both contract and tort claims. These include:
There is a sea of laws and regulations controlling safety, land use, business, employment, and other matters that business owners must abide by — and ignorance of them is no excuse. If you don't pay attention to regulations and laws governing your business, you might find yourself on the receiving end of a citation or lawsuit for parking too many cars on the street, having an unsafe workplace, or causing an environmental disaster. Make sure you have a thorough understanding of the laws that apply to you, especially if you are in a heavily regulated industry such as manufacturing, food preparation, or professional services.
Finally, it should be no surprise that you can also get in trouble by breaking various criminal laws. Businesses traditionally have special problems with failing to pay taxes; with property crimes such as theft, fraud, and arson; and with antitrust laws that prohibit forming monopolies.