Kentucky Supreme Court Addresses Nature of Sole Proprietorship

Kentucky Supreme Court Addresses Nature of Sole Proprietorship

      In a recent decision that was focused upon whether the proper parties to an action had been named, the Kentucky Supreme Court provided some useful guidance on the nature of a sole proprietorship. This “organizational form” receives very little either academic or judicial attention even as they are prominent in the economy. Sparkman d/b/a In-Depth Sanitary Service Group v. Console Energy, Inc., Nos. 2013-SC-000119-DG and 2013-SC-000831-DG (Ky. Aug. 20, 2015). This opinion is designated as “To Be Published.”

      This decision arose out of a question as to whether or not a verdict was legitimate in light of confusion as to the designation of certain of the parties, they being an individual, Keith Sparkman, his sole proprietorship for which no certificate of assumed name had apparently been filed, In-Depth Sanitary Service Group, and a corporation that Sparkman ultimately formed with his wife, In-Depth Sanitary Service Group, Inc. In the course of untangling the web of confusion, and ultimately determining that there was no error, the Court discussed the relationship of a sole proprietorship and the sole proprietor. Cutting to the chase, the Court observed:

Here Keith Sparkman and Group, his d/b/a entity, were essentially synonymous, given the legal status of a sole proprietorship. Slip op., at 7.

      Differentiating a sole proprietorship from a wholly owned corporation, citing therefore the decision rendered in Miller v. Paducah Airport Corporation, 551 S.W.2d 241 (Ky. 1977) for the proposition that “individual was not proper plaintiff even though he was sole owner of the corporation that was the real party in interest.”, the Supreme Court wrote:

A sole proprietorship is defined as “a business in which one person owns all the assets, owes all the liabilities, and operates in his or her personal capacity.” Blacks Law Dictionary (10th ED. 2014). A sole proprietorship, therefore, differs greatly from other business organizations such as corporations or limited liability companies (LLCs) even in cases where a business organization has only one shareholder or member. For example, the sole member of an LLC or sole shareholder of a corporation is not entitled to assert in his or her individual capacity the rights of the business organization. Turner v. Andrew, 413 S.W.3d 272 (Ky. 2013); Miller, 551 S.W.2d 241. An owner of a sole proprietorship, on the other hand, is liable in his or her personal capacity for the liabilities of the sole proprietorship, and may assert the rights of the sole proprietorship in his individual capacity. Slip op., at 12-13.

In support thereof, the Court also cited William Bardenwerper, 4A Ky. Prac. Methods of Prac., Part III: Business Organization, § 18:1.

      Addressing Sparkman’s failure to file a certificate of assumed name for “In-Depth Sanitary Service Group,”, the Supreme Court rejected the suggestion that the contracts entered into were by reason thereof in any manner deficient. Rather, the Supreme Court that wrote that:

As a sole proprietorship, Group’s contracts are Sparkman’s contracts; and Sparkman’s failure to comply with the assumed name statute does not invalidate those contracts as the Court of Appeals suggested. Slip op., at 15 (emphasis in original).

      While not cited in this opinion, the treatment of the sole proprietorship as set forth in this decision is consistent with the ruling issued in Kentucky Employers Mutual Insurance v. Ellington, 2015 WL 2340284 (Ky. May 14, 2015) (HERE IS A LINK to a review of that decision), wherein the Court held that the sole proprietor is not in turn an employee of his sole proprietorship.

      I do have a small quibble with the opinion with respect to assumed name filings. As set forth on page 13 of the slip opinion, it is stated that “To operate under an assumed name, Kentucky Revised Statute (KRS) § 365.015(2) stipulates that a party must first file a certificate of assumed name with the Secretary of State.” (Emphasis added). Strictly speaking, this is not true. All of business corporations, partnerships, LLCs, etc. do file certificates of assumed name with the Secretary of State. The exception to that rule is a sole proprietorship; certificates of assumed name for a sole proprietorship are filed with (and only with, the county clerk. KRS § 365.015(2). It’s a admittedly small quibble, but as the decision is focused upon the treatment of sole proprietorship’s, it’s an important one.