There are two common business entities that leave the business owner exposed to great amounts of personal liability. The two entities are sole proprietorships and general partnerships. These business forms are popular because they are easy and inexpensive to establish and operate. Warning: The money saved in establishing a sole proprietorship or general partnership can cost you everything.

Sole Proprietorship = Financial Suicide
A sole proprietorship is the default form of business and is owned by only one individual. A business remains a sole proprietorship unless you bring in another owner or unless you establish a different business form like a corporation or LLC.
Additionally, a sole proprietorship cannot legally hold assets—the business owner is required to hold the business assets personally. Therefore, if your business is owned through sole proprietorship, your personal assets are at risk from business lawsuits, and your business assets are at risk from personal lawsuits. Essentially, everything you own is in jeopardy. If while playing in a recreational softball league your home run hit a jogger running in the park and that jogger sued you and won, creditors could attach the equipment in your bakery to pay for the judgment. If a customer sues your bakery because they found a button in their walnut cookie, your home is at risk in the judgment.
Be careful if your spouse has a sole proprietorship. Commonly one spouse is the financial breadwinner and the other spouse starts a small business from home. By operating the sole proprietorship, the spouse places the entire family’s assets at risk.
By definition, most sole proprietorships are small businesses. If you plan to operate a “risky” business, you must create a more protected form of business.
General Partnership = Financial Suicide
A general partnership is dangerous and you should avoid it at all costs. Each partner in a general partnership shares the authority to act on behalf of the partnership. Each partner acts as the CEO. For example, in a general partnership with three individuals where one partner buys a $100,000 Mercedes, one signs a ten-year office lease, and one commits to a million dollar ad campaign, they are each responsible and entirely liable for the actions of the others. If the owner of the Mercedes cannot pay for it, the other partners must. As a member of a general partnership, you are liable for every asset owned between you and the other partners—even if you did not make the decision to acquire the assets. A general partnership leaves you and your assets extremely vulnerable.
In addition to being liable for partnership debts such as those discussed above, general partners are also liable for personal lawsuit judgments against the other partners.
Don’t Let This Happen to You
Bette was a stay-at-home mom for twenty-five years, but dreamt of having an interior design business. When her youngest left for college, she was excited to start an interior design business with her best friend. Bette was responsible for purchasing furniture and accessories as well as creating the designs. Her best friend was responsible for the accounting and for implementing Bette’s design for their clients. One afternoon, Bette’s dream became a nightmare. Her partner called Bette in tears. She had recently hung a large mirror for a client and the mirror had just fallen, shattered and killed the client’s miniature show poodle. Even though it was entirely the fault of Bette’s partner for failing to provide adequate support for the mirror, the client successfully sued Bette. Bette’s best friend filed bankruptcy and because the business was a general partnership, the creditors then went after Bette’s, and her family’s personal assets.
General partnerships are easy to form. Two people talking about a business venture at a kitchen table can verbally form a partnership. Many years ago, three friends and I discussed starting a company. At the close of the meeting, we decided we were “partners” in this new business. Shortly thereafter, we discovered the business concept wasn’t feasible and the short-lived “partnership” dissolved. However, the four of us became general partners that day. Had one of us been involved in an auto accident while pursuing our business concept, an aggressive creditor may have attempted to attach my personal assets as well.
Operating a sole proprietorship or general partnership can instantly strip you of your wealth. If you are already operating a risky sole proprietorship or are in a general partnership, you should immediately convert the business into a more appropriate entity such as an LLC. In doing this, you are converting unlimited personal liability into limited liability. First discuss the conversion with your tax advisor and business attorney because of the potential negative tax consequences.

Operating a sole proprietorship or general partnership can instantly strip you of your wealth.