Liability issues
Sole proprietors are not protected from any business liabilities. If the business were to take on debt, file bankruptcy, or dissolve, creditors can go after the owner’s personal assets, including bank accounts, houses, cars and other property.
Single-member LLCs are attractive because they can shield owners from the liabilities associated with the business. However, the limited liability protection isn’t as robust as it is for
traditional LLCs (those with multiple members).
A court may overturn any business owner’s liability protection. Limited liability is based on the idea that the company and the individual are two separate entities. Since a single-member LLC is a disregarded entity, owners are less likely to keep personal and business affairs separate, and a court may be more likely to
pierce the corporate veil.
If the corporate veil is pierced, the court may allow a creditor to go after the personal assets of the LLC member.
To keep your liability protection intact, you need to make sure that you cross your T’s and dot your I’s. Single-member LLC owners should maintain a formal operating agreement that governs how the LLC functions, ensuring that the business complies with both federal and state law. Owners should also keep all business and personal financials separate from one another.