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The Unlimited Liability Sole Proprietorship

James W. Martin

Let’s say you are starting a business all by yourself. No partners, no investors, just yourself. Which would you choose: to do business with unlimited personal liability or to do business with limited personal liability? Well, unless you like to be sued, you would choose to limit your personal liability. How do you do that? In Florida you do that by forming a corporation or a limited liability company. If you go into business by yourself without an entity, then you are a sole proprietor and you have unlimited personal liability.

Let’s look at two cases. In the first one, Joe (not a real person) opens a candy store all by himself. He buys candy from a wholesaler supplier under a supplier’s account in his own name “Joe”. He rings up sales on the cash register himself and deposits each day’s receipts to his personal bank account in his own name “Joe”. He signs the store lease in his own name “Joe” and pays rent with his personal checks as “Joe”. All goes well the first year. He sells $100,000 in candy that he bought wholesale for $50,000 and paid out $20,000 in rent so he netted $30,000. Then someone gets sick on his candy. Then someone else. Pretty soon he’s got a dozen claims against him. He calls his supplier who tells him a bad batch of candy is making people sick all across the country and the candy manufacturer is out of business. Joe gets sued. First, by the dozens of sick customers, and then by his landlord. They all sue him personally because he is a sole proprietor. He did not make the candy. He did not know the candy was going to make people sick. All he did was sell the candy. Still, because he is a sole proprietor, he is the one getting sued. When court judgments are rendered against him personally, the judgment holders will be able to reach his bank accounts, motor vehicles, and other assets (except his exempt homestead in Florida and certain other exempt items, as mentioned in my article on protecting nest eggs in Florida). Not a pretty picture.

What about insurance, you say? Yes, if Joe had insurance, the insurance company might defend him in court and pay the judgment. Insurance only covers certain things, though, and it always has limits. So, if Joe did not have products liability insurance, then he might not be covered. In addition, if he had $100,000 of insurance and the claims exceeded that amount (perhaps someone died from the candy), then Joe’s personal assets would be at risk.

What if Joe operated his business under a fictitious name, you say, like “Joe’s Candy Store” (not a real name)? Well, fictitious names are just that: fictitious. They are not entities. It is true that they must be registered with the Secretary of State of Florida, but they give no protection other than compliance with the legal requirement of registering as a fictitious name.

How can Joe limit his personal liability? By forming an entity, such as a corporation or a limited liability company, such as Joe’s Candy Store, Inc. or Joe’s Candy Store, LLC (not real names). Entities are formed by preparing legal documents, some of which are filed with the State and some of which are kept on file in your office. It is, of course, best to have a lawyer prepare the legal documents, especially when avoiding liability is one of the main reasons to form the entity.

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