A sole proprietorship is a business structure where the owner of the business assumes all the risk and benefits of running the company. Consequently, a lawsuit against a sole proprietorship can have significant financial consequences for the small business owner.
A sole proprietorship is not considered a separate legal entity from its business owner. You, the owner and sole proprietor, and your business are considered one and the same in the eyes of the law. Suing the sole proprietorship is the same as suing you. As such, this type of business structure does not provide you asset protection from creditors or others who may bring a lawsuit against the sole proprietorship. Under the law, there is no legal distinction between the assets and liabilities of the sole proprietorship and those of its owner.
Read More: An LLC Vs. Sole Proprietorship
A lawsuit against a sole proprietorship may result in the issuance of a judgment. A judgment is a decree issued by the court that specifies the debtor's liability for a debt and the amount owed on that debt. This judgment will be against you, the sole proprietor, and your business, the sole proprietorship. With a judgment, the judgment owner has the legal right to pursue collection of your personal and business assets to satisfy the judgment debt.
The owner of a judgment can use various methods to collect your assets. Depending on state law, the judgment owner may be able to seize funds in your checking account. Since the judgment is against you and your sole proprietor business, this seizure could include money in both your business and personal checking accounts. The judgment owner may be able to place a lien on property that you or your business owns. Also, a wage garnishment may permit the judgment owner to seize a portion of your earned wages from any employment income you may have.
Statute of Limitations
A lawsuit against your sole proprietorship can have lasting effects for years to come. A judgment against you has a statute of limitations, which refers to the amount of time a judgment owner can pursue you and your assets for payment of the judgment debt. The lengths of these statutes vary by state. For example, in Georgia the statute of limitations on judgments is seven years from the date issued by the court, but in Alabama, this statute extends to 20 years. Also, some states permit judgment owners to renew a judgment one or more times after the judgment expires.
Mack Mitzsheva is a tax lawyer, personal finance expert and the author of the forthcoming ebook, "10 Best Places to Work Online." Mitzsheva is also a social media entrepreneur with five successful sites under her belt. Always innovative, Mitzsheva is currently developing a cutting-edge budgeting app for newlyweds.