Do Sole Proprietorships Need Business Insurance?
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Summary:
Unlike corporations and LLCs, sole proprietorships do not offer protection for a business owner’s personal assets. The good news is sole proprietors can protect their personal and business assets through various forms of business insurance. Nevertheless, liability is certainly a factor to consider when choosing what type of business insurance might be most relevant.
As any entrepreneur is aware, starting your own business can be a risky endeavor. Maybe you want to start a business that focuses on one of your skills, but you don’t know anything about how to structure and run a business. Personal fortitude is a virtue held by numerous successful entrepreneurs, but smart management and company structuring are just as important to the success of a business.
There are many different ways to structure a business in the United States, but sole proprietorships are the most common form of business ownership. With sole proprietorships, there is no legal differentiation between the person who owns the business and the business itself. Because of this, if you want to make sure you are protecting both your business and your personal assets, the smartest play is to get the right business insurance.
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What is business insurance for sole proprietors?
Sole proprietor business insurance is a type of small business insurance. Sole proprietors use business insurance to both insure their small businesses and mitigate risk due to potential changes in the market.
General liability and professional liability insurance can protect small business owners from suffering bankruptcy as a result of lawsuits brought on by circumstances completely out of their control. Furthermore, many business owners opt to obtain business interruption insurance to make sure their business is protected from any disaster that may disrupt their operations.
It’s crucial to note that small business insurance for sole proprietors is also personal insurance. If your business runs into trouble, your personal assets and wealth could be on the line, potentially leaving you high and dry on the side of the road wishing that you had taken the proper precautions to protect yourself sooner.
What is a sole proprietorship?
A sole proprietorship is the most common form of business entity in the United States. According to statistics released by the U.S. Census Bureau, sole proprietorships constitute more than 73% of the business entities in the U.S. You can see the stark difference between the distribution of sole proprietorships and other entity structures, such as S corps and partnerships, in the graph below:
Pros and cons of a sole proprietorship
In sole proprietorships, there is no difference from a legal standpoint between the business and the business owner. This can have certain advantages, as well as some significant disadvantages.
Pros of a sole proprietorship
Here are some of the upsides to running your small business as a sole proprietorship:
Simplicity
Sole proprietorships are very simple to set up and require limited paperwork. If you’re looking to start your business right away, this is the quickest and easiest option.
More financial control
In sole proprietorships, cash inflow and outflow are controlled by one person: the sole proprietor. This means that if you structure your business as a sole proprietorship, you get to keep all the profits your business makes.
Easier decision-making
When it comes to running a sole proprietorship, the sole proprietor has maximum authority. You get to run your business however you see fit. If you want to make sure you have the final say over every facet of your business, you may want to consider being a sole proprietor.
Cons of a sole proprietorship
Here are some of the downsides to running your small business as a sole proprietorship:
Personal liability
In a sole proprietorship, the business owner’s assets and the business’s assets are the same, and so is the liability. This means that if you ever get into a dispute with a customer or client, a court ruling in their favor could put your personal assets at risk.
Unlimited liability
Contrary to a limited liability company (LLC), a sole proprietorship has virtually unlimited liability. This means that if you get hit with a lawsuit, it can be extremely detrimental to your business, not to mention it can cost you your personal assets as well.
Financing challenges and lack of tax advantages
Raising capital for a sole proprietorship can be much trickier than for an incorporated business. Also, an incorporated business can qualify for government subsidies and tax credits, whereas a sole proprietorship cannot.
Types of sole proprietor insurance
The biggest risk that comes with running a small business as a sole proprietor is liability. And one the smartest ways to limit that liability is to invest in the right business insurance that provides the best liability coverage for your needs.
Here are some of the most common types of business insurance for sole proprietors:
General liability insurance
General liability insurance acts as a sort of bulwark to protect a business owner from financial loss after being sued. This is particularly useful if the liability has nothing to do with your business practices but is instead related to some unforeseen event, such as personal injury that occurs at your business’s location.
Imagine you run a taco shop, and someone slips on the floor and injures themselves. Even if it isn’t directly your fault, you could be sued into oblivion. That’s why many small business owners spring for general liability insurance, as it protects the business owner from losses that could result from property damage, bodily injury, and lawsuits.
Pro Tip
If you work out of a home office, then you may be able to add general liability insurance to your homeowner’s insurance. After all, your home and office are essentially one and the same.
Professional liability insurance
If your business provides services to clients, you may want to consider investing in professional liability insurance, also known as errors and omissions (E&O) insurance. A sole proprietor can be sued over mistakes, inadequate work, misrepresentation, and bad advice, and you want to make sure you have the right liability coverage to protect you from those potential losses.
For example, if you’re a graphic designer and you accidentally print a major typo on all your client’s flyers that cost them a lot of money, they could sue you for that mistake. Or, if you accidentally infringe on another designer’s copyright, they could sue you for personal and advertising injury, which could cost you a fortune in legal expenses.
Investing in sole proprietorship insurance, specifically professional liability insurance, will help mitigate those risks. However, it’s important to note that professional liability insurance does not cover all liabilities; typically, it will only cover costs related to legal fees and defense fees.
Workers’ compensation insurance
Many sole proprietors don’t need workers’ compensation insurance — colloquially known as “workers’ comp” — simply because they’re the only ones running their business. However, you may want to invest in workers’ comp for your sole proprietorship to cover any employees you need to hire temporarily or even to cover yourself in case you suffer an injury on the job that your health insurance won’t pay for. In fact, some states will even require that a business include workers’ comp, even if it only has one employee.
Workers’ compensation insurance provides coverage for medical bills, disability benefits, and lost wages due to bodily injury. In the unfortunate event that an employee dies on the job, such as by falling off a ladder or balcony while working, workers’ comp will even foot the bill for the funeral.
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Business interruption insurance
Business interruption insurance, also known as business income coverage, can cover lost income that is directly related to an unforeseen disaster, such as a fire or flood. This type of sole proprietor insurance coverage can be used to mitigate operating expenses while your business returns to normal, including taxes, loan payments, and mortgage, rent, or lease payments.
Cyber liability insurance
In the digital age, business owners all over the world grimace at the idea of being hacked. Not only can a hacker steal valuable data, but they can also hold your company for ransom by locking your servers until you pay the bad actors in cryptocurrency.
Cyber liability insurance can protect your business in the case of a data breach or malicious software attack. This is especially important if you are storing valuable customer data that is sensitive to hacking.
Commercial property insurance
Commercial property insurance is vital to ensure that you are operating your business in a viable workplace. If property damage occurs due to vandalism, floods, fires, or any other events, then property insurance can help compensate you for repair costs and lost revenue.
Commercial auto insurance
If a sole proprietor business uses commercial automobiles, such as trucks or vans for delivering goods, then commercial auto insurance can be a lifesaver. Just as drivers are required to have personal auto insurance to protect them in case of a car accident, sole proprietors should have commercial auto insurance to cover any damage caused by a commercial vehicle.
How to get sole proprietor insurance for your business
If by now you are paralyzed with fear over all the possible claims and lawsuits your business could face, you know that now is a good time to start looking for business insurance. Here are some options for how to find sole proprietor insurance:
Contact an insurance company
Most insurance companies have an online platform through which you can contact them directly. An insurance company will give you multiple quotes and packages to choose from. However, it’s best to do some research on the types of insurance you’re offered before you buy them to ensure they’re relevant to your business. For example, an insurance company may quote you for errors and omissions insurance in five minutes, but it’s up to you to decide if you really need it.
Find an insurance broker
The benefit of seeking out an insurance broker is that you can speak to another person face to face. You can tell them all of your deepest, darkest fears about liabilities in your business that could leave you bankrupt, and they will understand exactly what you are looking for. Be forewarned, though, that some brokers work only on commission, so keep an eye out for those who may try to sell you insurance you don’t actually need.
FAQ
Can you buy insurance as a sole proprietorship?
Yes, you can buy business insurance as a sole proprietor.
How can a sole proprietor protect a business?
Sole proprietors can protect their business against liability and unforeseen events by buying the relevant business insurance for their needs.
Does umbrella insurance cover sole proprietorship?
Yes, umbrella insurance for sole proprietors will cover some liability, but not all of it. It’s best to find out what type of business liability insurance you might need and see if you can find that insurance at an affordable rate.
Why is business insurance important for a sole proprietorship?
Business insurance is important for sole proprietors because when you structure your business as a sole proprietorship, your personal assets are also at risk.
Key Takeaways
- From a legal standpoint, there is no difference between a sole proprietorship and its owner. The business is an extension of the owner, who is personally responsible for any liability.
- Due to the unlimited liability and risk to personal assets that sole proprietorships face, sole proprietors should consider investing in small business insurance.
- There are multiple types of insurance for sole proprietors, including general liability insurance, professional liability insurance, and worker’s compensation insurance.
- Most insurance companies will offer quotes for insurance online. However, depending on your business’s specific needs, it may be smart to get help from an insurance broker rather than an insurance provider.
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