Tuesday, September 4, 2012


The trouble with being in business as a sole proprietor is that you remain personally liable for the debts and lawsuits against the business. You have not created a separate legal entity—you and the business are one and the same. If the sole proprietorship called Mary's Muffins accidentally sells ten dozen tainted blueberry muffins that send swarms of sick people to the ER, Mary is in a whole lot of trouble. All the lawsuits will be filed against her personally, and the creditors who used to spot her flour, oil, sugar, etc., are going to come after Mary personally for any unpaid bills. Also, some students seem to think the term "sole proprietor" means "no employees." Not at all. It just means that when it comes to the ownership of the business, there is only one individual human being, with no actual separation between him and his business. Believe it or not, some broker-dealers and many investment advisers are owned as sole proprietorships.  To protect assets, there is always insurance.  But, to be a sole proprietor without sufficient liability insurance for damages one might cause; that is risky business. I often marvel that as a high school and college student I owned a small, not-quite-lucrative carpet cleaning business. At one point, I called it Dunwell Cleaning, because that sounds like a business, doesn't it? It was really just an assumed name, and I had to publish a text ad in the local newspaper that probably no one in the greater Champaign-Urbana area ever read announcing that Robert Walker is now doing-business-as (DBA) Dunwell Cleaning. I received an assumed name certificate from the county so that I could open a bank account in my name "DBA Dunwell Cleaning" and customers could write checks to a business as opposed to some 22-year-old kid named Bob. The liability I took on entering people's homes, businesses, and sorority houses was actually huge in retrospect--I could have ruined thousands of dollars of carpeting, or maybe somebody trips over the extension cord I'm using on the second floor and gets seriously injured, or maybe some hysterical customer calls at 2 AM screaming that her children have been rushed to the ER due to an allergic reaction to the spot remover I sprayed all over the poor kids' bedrooms. Luckily, I was just smart enough to buy some liability insurance that would have paid out on some of those claims, although--now that I think of it--I had no assets at the time, so what the heck was I protecting? Anyway, if one does have assets (nice houses, cars, stocks, bonds, and annuities, etc.) one needs to think long and hard about doing business as a sole proprietor. Without the right insurance coverage, sole proprietors can easily end up losing everything they own over a lawsuit or bankruptcy filing. NEED HELP WITH YOUR EXAM?

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