Extending the Veil to Solo Entrepreneurs: A Limited Liability Sole Proprietorship Act (LLSP)

Monday, January 1st, 2001 at 12:00 am by Mitchell F. Crusto
Mitchell F. Crusto, Extending the Veil to Solo Entrepreneurs: A Limited Liability Sole Proprietorship Act (LLSP), 2001 Colum. Bus. L. Rev. 381

A solo owner of an unincorporated business faces personal exposure for his business liabilities. He is subject to unlimited liability from many sources: the solo owner is responsible for his direct acts, for the acts of his would-be agents, as well as his acts as a fiduciary for others. In a broad liability scheme, including vicarious liability doctrine and spreading the risk/deep pocket rationale, the unincorporated sole proprietor is subject to financial ruin both for his business and for his personal assets. He exposes his personal assets to liabilities, not limited to his business assets or his investment in the business.

A case in point is the story of Mr. Joe Doe, a 55-year-old man, who was laid off from his position as a store manager in one of the Wal-Mart stores that went bankrupt a few years ago. Mr. Doe had a wife and five children, three of whom were still in college. By all standards, Mr. Doe was middle class, and hoped to maintain that status by working hard.

However, due to his age, Mr. Doe was unable to find another job. He decided to start his own delivery business as a sole proprietor. He invested his savings of about $150,000, bought two cars for the business, and hired two employees. One of the employees, on his way to delivering some items to one of their customers, hit a pedestrian. The victim sued Mr. Doe under vicarious liability theory.

The court awarded $500,000 to the victim who lost the use of one of her legs due to the accident. The judgment award not only immediately bankrupted his business, but also forced Mr. Doe to sell his house and other valuable possessions and to expend his children’s college funds and all his and his wife’s retirement savings. Mr. Doe and his family are now on welfare. Picture this unfortunate incident happening throughout America, in rural and urban areas, in poor and affluent communities. Something needs to change.

Shielding a shareholder’s personal assets from business liability is a quintessential element of corporate law. This “limited liability” protection has been recently expanded through the development of two new business entities, the limited liability company (LLC) and the limited liability partnership (LLP). This expansion of limited liability raises a probing question: should limited liability protection be provided to the unincorporated sole proprietorship, and if so, how?

Most businesses in this country are unincorporated sole proprietorships, businesses owned and operated by one person. Unincorporated sole proprietorships are often found in underdeveloped, poorer communities, including inner cities and rural areas that are challenged by limited capital, poor access to insurance coverage, limited training, and unsophisticated legal and technical skills. This article explores the issue of shielding a sole proprietor’s assets from business liability.

“In general, business planning involves the following three objectives: (1) minimization of income taxes; (2) limitation of individual liability; and (3) provision of flexibility and ease in operation.” Limiting a shareholder’s liability for business debts is an important corporate feature, and may be the most important reason why businesses incorporate. Similarly, the law of limited partnership provides limited partners with protection from business liability. Recent legislative developments expand the doctrine of limited liability; the limited liability company (LLC) and the limited liability partnership (LLP) provide business owners with new liability-limiting options. The sole proprietorship remains the only legal entity directly left out of statutory limited liability schemes.

This article explores the dimensions of directly providing limited liability to sole proprietorships. Part II describes the law of sole proprietorship, its statutory foundation, judicial treatment and its current features. Part III analyzes how sole proprietors are subject to default rules of unlimited liability, resulting from a sole proprietor’s direct acts, vicarious liability for their agents and/or employees, and as fiduciaries for others. Part IV proposes the features of a Model Limited Liability Sole Proprietorship Act (“LLSP”). Part V makes the case for statutory limited liability for sole proprietorships and reviews existing liability-limiting options and analyzes how those options are unsuited to the needs of sole proprietors. The author concludes by arguing, as a matter of distributive justice, legislatures should enact a uniform statute addressing sole proprietors’ needs, especially limited liability.

Author Information

Associate Professor, Loyola University New Orleans School of Law