Sole Proprietors are individuals in the business world without a legal umbrella to protect them personally from liability. That may be fine for some types of businesses that have limited risk exposure. All types of risk are impossible to calculate, and risk can come in many forms. Here are some things to think about when your gauging business risk to answer the question of whether to incorporate. And just remember that this is not an exhaustive list and risk factors will vary depending on the type of business.
- Do you deal with new people and/or businesses frequently? The more people you deal with, with varying interests, the greater the risk.
- Is there substantial potential for large claims, or can you reasonably anticipate a cap on what you can be held liable for and frequency of claims? Don’t forget about torts – things like a slip and fall at your business, a manufacturing defect, or an employee that causes an injury.
- How many contracts or transactions do you enter into? What is the average dollar value? Think about verbal contracts as well as written contracts. Contractual liability is risk.
- Are your supply chains and staff solid enough to keep you delivering and your finances in the black?
- Does your business sign contracts drafted by another party, or is it bound by terms and conditions written by someone else?
- Are you in complete control of all the business matters that can result in a liability? Or do you trust other people to safely, timely, and effectively perform the business obligations? Nobody will care as much about your liability as you.
- Is there a great deal of industry standards and compliance that must be completed to avoid risk? Breach of standards and regulations can result in liability to both public and private entities.
- What do you have to lose? If you have assets, or plan on having assets, think about protecting them.
- Who am I out to protect, besides myself? If you have a family or other dependents, you may owe it to them to protect your assets.
- Sometimes the designation as a corporation, LLC, or other entity recognized by the State and IRS helps build credibility in the eyes of competitors and customers. Avoid the risk of missing out for lack of a credible appearance.
If you’re operating without an umbrella of a recognized state business entity you should consider these questions and more. If you’re just starting out answer them before you launch. In either case they need to be part of your SWOT analysis. This is a deep-dive into your Strengths, Weaknesses, Opportunities, and Threats.
1Source Law recommends a comprehensive analysis of risk when deciding whether to form a business entity.
Lead Attorney & Owner