Legal Protections for Solopreneurs

Many small business owners operate as the default business structure, sole proprietorship, because it’s easy. Sole proprietorship is a default business structure. There is no paperwork to file. You simply declare yourself in business, and you are. The downside of sole proprietorship as a business structure is that, should your business be sued, your personal assets and business assets are legally considered one and the same. This could include your home, your car, and your bank accounts. It’s important to take the necessary steps to take advantage of legal protections for solopreneurs. So what’s a solopreneur to do in order to maximize legal protection of their personal assets? You should consider changing to a more advanced business structure than a sole proprietorship, because easy isn’t always better.

Why Legal Business Structure Is Important

As a solopreneur, it’s most likely that a single-member Limited Liability Company (LLC) is the best and easiest business structure to set up that will legally protect your personal assets. The more advanced business structures, such as LLC, exist as their own entities to protect personal assets. In the eyes of the law, there is a corporate shield that exists with an LLC to protect you personally from business debts.

 

More advanced legal business structures require additional steps to set up, but it’s important not to be intimidated. Creating an LLC only takes a few more steps, and the legal protections an LLC offers are probably worth the peace of mind you get in return.

Why You Should Keep Personal Funds and Business Funds Separate

Not only should you set up an LLC, it’s also vital to separate your personal information from that of your small business. Your small business should have a separate name that you register with your state, an Employer Identification Number (EIN) rather than your social security number, plus a business bank account and business credit cards to keep your personal and business assets clearly delineated and separate.

 

Your business funds and your personal funds should always be kept clearly distinct and separate from each other to avoid the appearance of co-mingling. Any co-mingling can open you up to legal and personal asset liability issues. The same goes for using business funds to pay for personal expenses. If by chance you are sued, a judge could nullify your LLC if your business and personal funds are co-mingled.

Your Small Business Should Maintain Comprehensive Insurance

Any business, regardless of size, should maintain adequate insurance to protect itself in the event of an accident, natural disaster, data breach, or any number of possible claims. Dealing with property and general liability claims can result in lost time, expense, and frustration. All small businesses should maintain adequate insurance to prevent such problems. Depending on the size and nature of the business, specialized insurance policies may be advisable to provide additional cover.

How to Change From Sole Proprietorship to LLC

When you want to change your business structure from a sole proprietorship to an LLC, the first step is to register with the state where you conduct business. Try a Google search for “[your state] LLC”.  You’ll need to choose a business name and fill out a couple of forms and send them in. After a few days or weeks, the paperwork will be approved and you’ll get notice through the mail or online.

 

When changing your business structure to an LLC, you’ll also need to create a formal operating agreement. That’s a legal document that sets out the ownership, rights, and responsibilities of the LLC’s owner. You can find boilerplate agreements online but you should consult an attorney to make sure you have all your bases covered.

 

A business structure only works if you’ve handled all the details. To make sure your change is recognized, it’s recommended that you:

 

  • Register your new business structure with your state.
  • File a DBA (Doing Business As) form. You can do this online on your state’s website and with the IRS.
  • Register with the IRS to apply for an updated Employer Identification Number (EIN), which you will use to file your taxes and pay your employees.
  • Reapply for state licensure under your new business name and structure.
  • Update your bank accounts and records to reflect your new business.
  • Update your insurance records to reflect your changed business structure.
  • Contact your vendors and suppliers to update them on the change.
  • Double check with your tax and legal professionals that all paperwork is filed and complete.

Conclusion

One very important thing to keep in mind is that you can change the organizational structure of your business if your situation changes. It’s possible to start off as a sole proprietorship and convert to an LLC or corporation for increased legal protections. As your needs grow and change, the structure of your business can change with them. As always, it’s best to consult with your attorney and accountant about what would be most suitable for you.

Ready to Grow?

Signup for our newsletter to receive business tips, tricks and strategies delivered straight to you.

  • This field is for validation purposes and should be left unchanged.