The Kaplan Group estimates that there are 29.8 million sole proprietorships in the US. It’s the easiest business model to set up and is definitely more popular now that e-commerce is the norm and subscription models are increasing.
You can register as a sole proprietor online in minutes, and it’s one of the most basic business structures. Unlike LLCs, one person takes all the profit and responsibility of the business, and there’s far less protection despite it being the most popular business model.
Legal risks in the US are high, from consumer complaints to class action lawsuits, and no business should rely on luck when it comes to managing legal risk. Read on to find out more.
Why Sole Proprietors Are More at Risk Than LLCs
The difference is liability.
An LLC creates a legal boundary between the owner and the business, whereas a sole proprietorship doesn’t. Any debt, claim, legal issue, or cash flow problem tied to the company can reach personal assets. Those include:
- Savings
- Vehicles
- Property
- Future income
There’s no protective layer in place for sole proprietors, which is why most take out a business insurance policy from the outset to mitigate the risk of losing personal assets.
Does that mean LLCs are not immune to risk? No, but they at least have that baseline protection as part of their business structure that provides a buffer against personal assets even without insurance. The only exception is if personal and business funds aren’t correctly segregated or if fraud or wrongdoing is suspected.
Sole proprietors operate without any of that fallback, meaning that if a client sues, if a contract dispute escalates, or if someone claims financial loss linked to your work, the exposure is direct.
And this risk exists regardless of industry. Consultants, tradespeople, creatives, online sellers, and service providers all face the same issue. The size of the business doesn’t reduce it either.
Why Any Sole Proprietor Shouldn’t Rely on Luck for Risk Management
Most sole proprietors facing legal trouble didn’t expect it. They were delivering work, serving clients, advertising, or simply doing what they do best. The issue usually comes from an out-of-your-hands event or a disagreement rather than negligence.
There’s absolutely no reason for someone to rely on luck just to save a few dollars each month on a monthly premium. Insurance is by far the most practical starting point. Professional liability cover protects against claims linked to advice or services, public liability focuses on injury or property damage, business insurance for sole proprietorship models is more inclusive of a broader spectrum of problems, and the legal expenses cover can help manage disputes.
That said, these policies don’t prevent problems, but they do prevent problems from ending the business.
The Legal Risks for Sole Proprietors
Legal risk for sole proprietors is more than you’d expect, but it’s no different from the standard business risks.
One of the most common has to be client disputes. A disagreement over scope, delivery, product or service outcomes, or contract issues can turn into a claim for damages. Without a separate legal entity, those claims are made against you personally.
Liability issues are another concern. If someone is injured because of your work or a product you supplied, the responsibility falls on the individual running the business.
Even a single legal letter can create legal fees that quickly outweigh months of income—many sole proprietors underestimate how fast costs escalate once lawyers are involved.
Operating without protection doesn’t mean issues are unlikely; it just means the consequences are financially heavier, and we guarantee they’re too substantial for a standard sole proprietor to cover themselves.
Relying on luck assumes nothing will go wrong. You don’t even need to be a business to know life is not sweet enough for nothing to ever go wrong, and you can imagine that amplified when the potential for claims to result in paying out thousands is not unrealistic.
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