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How to Protect Yourself When You Run a Sole Proprietorship

November 21, 2018
Small Business

A sole proprietorship means that you are the only owner of your company or business. If this is you, there are very specific ways that you must deal with your finances so that you don’t end up in trouble with the IRS. If you make financial errors and are caught, your personal wealth might not be protected. Here are four ways to protect yourself when you run a sole proprietorship.

Choose the Right Business Entity

When you run a sole proprietorship, it might seem like a great idea to own the company on your own. However, you might be assuming a huge amount of financial risk. A sole proprietorship means that you can be held personally responsible if something happens. Your investments, your personal property, and even your home might be vulnerable to a potential lawsuit if something goes wrong. If you set up an entity like a limited liability or corporation, you can better protect your personal wealth.

Keep Your Personal and Work Finances Separate

The best way to avoid financial trouble if you are a sole proprietorship is to make sure that you always keep your personal and work finances separate. That means maintaining different accounts and having the proper documentation to separate what the business owns and what you personally own. It also means that you pay your business and personal taxes on time and claim the proper withholdings, etc.

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Have Proof That You Are a Reputable Business

To protect yourself when you run a sole proprietorship, it is essential that you never act fraudulently or neglectfully. If something happens, you will want to prove that your negligence didn't cause it or that you behaved fraudulently. Otherwise, you could open yourself up to a personal suit that could involve your assets.

Make Sure to Have the Right Type of Insurance

If you run a small business or company, it is imperative that you have the proper insurance needed to protect your business and your personal wealth. Once you protect yourself through choosing the proper entity, make sure that you have all the necessary insurance to protect yourself from things like personal injury lawsuits that can really harm your business and potentially affect your personal finances.

Sole proprietorship might seem like the American dream, to own your own company. And it can be for some people, as long as you make sure to protect yourself and your personal wealth. If you’re interested in learning more about whether sole proprietorship is for you and how you can protect yourself, download our free eBook, Dangers of Sole Proprietorship.

Christopher Ragain, CPA

Christopher Ragain, CPA is the founder of Halon Tax and one of the industries top authorities on micro-business taxation and tax planning.

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