Why Your “Sole Proprietorship” May Be Putting Your Personal Assets in Danger

Many small business owners in south Louisiana, and particularly New Orleans, are formed as sole proprietorships. Under this form of business, there is no separate entity or legal distinction between the business and the person. Sole proprietorships are abundant in south Louisiana because they are easy to form, have low start up costs, have no annual compliance and are easy to handle when dealing with tax preparation.

However, there are significant disadvantages to keeping your small business a sole proprietorship. For instance, all of the assets of the business are subject to an owner’s personal liabilities and all of an owner’s personal assets are subject to the liabilities of the business. This means that if the assets of the sole proprietorship cannot satisfy a debt, a creditor may go after an owner’s personal assets to recover the difference. This often leaves the owner in an extremely vulnerable position.

Comparatively, a limited liability corporation (“LLC”) that is properly operated can provide adequate insulation for an owner’s personal assets that a sole proprietorship cannot. There are limited situations in which an LLC member can be held personally liable for the business’ debts. For instance, a member may be held personally liable if he or she (1) personally guarantees a debt of the LLC, (2) intermingles personal and business funds, or (3) fails to adequately capitalize or insure the LLC. Generally, however, the personal assets of an LLC’s member are much better protected from the business’ liabilities than they would be under a sole proprietorship formation.

Note that there is no single answer to whether an LLC (or any other business entity) is the best entity formation for your Louisiana business. All small business owners should educate themselves on the pros and cons of each business entity form, whether it be a sole proprietorship, limited liability company, partnership or corporation. Many factors of a particular business, including but not limited to taxation and future investor opportunities, will determine which entity formation is best for your business.

If you would like to consult with an experienced, New Orleans business attorney, you can contact HH&K by filling out our free, no obligation case review form located on this website or calling 844-943-7626 for a free case review.