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Tips for protecting a sole proprietorship

On Behalf of | Jun 15, 2024 | Business & Commercial Law

Starting a business is a big decision. One of the first things the entrepreneur has to decide is what type of business structure to use. For some who are just starting out and don’t have a very risky business model, a sole proprietorship may be an attractive option.

A downside of this business model is that there isn’t any separation between the business and the owner’s personal assets. This puts the owner at risk of losing their personal assets if there’s a claim made against the business. Taking a few steps may help to afford them some protection in this regard.

Obtaining adequate insurance coverage

Insurance can help to protect the company from a variety of financial issues. Some policies to consider include:

  • General liability insurance covers legal expenses and damages if the business is sued.
  • Professional liability insurance offers protection against malpractice or negligence claims for individuals offering professional services.
  • Property insurance provides protection for the company’s property and added liability coverage protects against injury claims.

Some sole proprietors may have to drive for work, so they should also ensure they have appropriate coverage for automobile crashes.

Implementing strong contracts and agreements

Clear and concise contracts can also provide valuable protection. These can be written between the company and vendors, clients, employees and freelancers. These contracts should outline all terms related to the agreement. This includes payment terms, scope of work and the responsibilities of each party. Some contracts may need non-disclosure clauses to protect the company’s interests and trade secrets.

Maintaining meticulous financial records

Accurate and thorough financial records help in monitoring the business’s financial health and preparing for taxes. Separate bank accounts for personal and business finances can prevent the commingling of funds, which is crucial for both legal and accounting purposes. Proper bookkeeping also ensures compliance with tax regulations, reducing the risk of audits and penalties.

Establishing a separate business entity

One effective way for a sole proprietor to protect themselves is by establishing a separate business entity, such as a limited liability company (LLC). An LLC can shield personal assets from business liabilities. This means that in the event of legal action or debt, only the assets owned by the LLC are at risk, not the sole proprietor’s personal assets.

Sole proprietors should take appropriate steps to protect themselves and their companies. Seeking legal assistance throughout the business formation process can provide information about necessary steps for getting the company up and running in ways that are most likely to lead to success.