Four Ways to Proactively Manage Risk for Your Sole Proprietorship

Mar 14, 2023
By: Zachary Murray
Associate at Mann Lawyers LLP Corporate & Commercial Law

Throughout their small business journey, sole proprietors need to wear a wide variety of hats.

On any given day, they can be all at once part salesperson, capital funding manager, human resources expert and even, at the worst of times, tech support. And on top of it all – while new business owners are being pulled in all directions, they also still need somehow find the time to understand the legal aspects of their business.  

As we’ve all seen in recent years, unforeseen issues such as COVID-19 and related restrictions can pop up seemingly out of nowhere that have a profound impact on the business environment.  

This makes it more important than ever to manage risks associated with owning a business and should also serve as a reminder that new business owners need to be proactive in taking the steps needed to mitigate risk and manage the unknown.  

If you’re a sole proprietor, or you’re thinking about how to set your business up for success – here are four ways to proactively manage the risks of sole proprietorship.

  • Get to know the risks and benefits of your business structure 

A business can take many different forms – each with unique risks for small business owners to consider. Many early-stage founders choose to start their business as individuals. Legally, this form of business is called a sole proprietorship: its main feature is that just one person owns and operates it, who receives all income generated as part of the business.  

But it comes with an inherent risk: Legally, you and your business become one entity. This means your liability is unlimited. The profits, as well as the debts and liabilities of the business, are yours personally, and if your venture should fail, you must use your own assets to pay back outstanding debts.  

If the risks of a sole proprietorship sound too great, you may want to consider incorporation. As a separate legal entity from its owner, a corporation protects said founder from many forms of liability relating to sole proprietorship. In most cases, your liability extends only to your equity (shares) held in the corporation, keeping your personal assets separate and safe. So, rather than your personal assets being exposed, you risk the value held in the shares. 

If you think incorporation could be the next step for your business, A business lawyer can guide you in this process and determine if incorporation is right for your company. 

  • Leverage legally binding contracts 

No matter which business structure you go with, legal contracts are a valuable legal tool in any entrepreneur’s arsenal. Contracts explicitly define the scope of your rights and obligations, such as when delivering a service to a customer. While the types of contracts your business signs may vary, basic contractual principles will not.  

Knowing your agreements are valid and enforceable ensures you know the extent of your rights and obligations and provides something to point to when things go awry. Not to mention that clear and well-drafted agreements can go a long way in reducing the risk of misunderstandings or disagreements and can help you to steer clear of any unwanted legal battles.  

  • Find the business insurance that meets your needs 

Another way to mitigate personal risk and potential exposure for a sole proprietor is business insurance. Some home insurance policies may cover business-related claims, but these policies typically have a low coverage limit for these types of claims and don’t really do much to protect you or your business.  

It’s always a good idea to speak with an insurance professional to be sure that you and your business are adequately protected. The coverage of insurance ranges, but business insurance typically covers negligence, injuries to third parties or property damage.  

Accidents happen every day – but finding appropriate insurance for your business is a smart and proactive approach to being prepared.  

  • Get ahead with expert advice 

Owning, and operating a business isn’t easy, and finding the time to determine the best way forward can be challenging. Fortunately, there are many experienced professionals to lean on, and there are plenty of ways to protect yourself and your business from a variety of risks.

Whether assessing your risks as a sole proprietor, considering incorporation, seeking out advice relating to a contract, or investing in business insurance, there are a variety of solutions available to small business owners.

Searching for legal advice and more resources? 

We know navigating business structure, contracts, and insurance can be difficult, especially if you don’t have a business background.  

If you’re looking for advice tailored to your business, our experienced partners at Mann Lawyers provide legal support for businesses of any size.


Looking for more legal insights to help run your business effectively?

We regularly host free in-person, virtual and hybrid events to help strengthen your business.

Check out the upcoming events on our events calendar.  

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