Did You Know? 5 Surprising Ways to Limit Your Sole Proprietorship Liability

A woman makes notes while looking at her laptop.

There’s something exciting and energizing when starting and running your own business as a sole proprietor.

You can see all your effort and hard work translate into a growing, thriving business. New ideas, innovations, and improvements seem to constantly buzz around your head, often waking you from a sound sleep.

Unfortunately, there are other concerns that can jar you from a restful slumber. A big one is sole proprietorship liability.

If your business owes money or you’re sued, both your business assets and your personal assets could potentially be impacted to settle claims or debts.

If you’re starting to feel like you could use some protection from sole proprietorship liability, there’s good news here. Read on.

5 Ways to Protect Yourself from Sole Proprietorship Liability

1. Get sole proprietorship insurance.

If you have a home and a vehicle, you likely have insurance for them. That way, if, for example, you are in an accident with your car or your house burns down, you likely won’t have to pay out-of-pocket to repair the car or replace the house.

It’s much the same way with sole proprietorship insurance. It can help protect your business from a wide range of risks. So even if you have an accident or are hit with a negligence claim, your business insurance can help with settlements or legal costs – up to your policy limit.

As a sole proprietor, the type of business insurance coverage you may need depends on the type of services you provide. There are typically two basic types of coverage: general liability insurance and professional liability insurance.

Here are a couple of examples of how each works:

General liability insurance in action.

Let’s say you have a janitorial business. General liability insurance may be able to protect your bank account if you accidentally damage a customer’s property. Imagine that you bump a chandelier in a sensitive spot as you’re dusting it and it falls to the floor and shatters.

Not only do you have to clean up the mess, your client sues you for $10,000 — the cost of the crystal chandelier. Yikes!

Without insurance, that lawsuit might clean out your bank account, and possibly more.

But if you have general liability insurance, your policy could pay to cover the replacement cost of the chandelier and defend a lawsuit if the building owner sues you (up to your policy limit).

Professional liability insurance to the rescue.

If your business involves providing a professional service, such as interior design, you may want to consider professional liability insurance. It can cover you if you’re accused of negligence or you simply make an honest mistake.

Imagine you’re working with a client on designing their new downtown office location. You recommend certain chairs for the space, but it turns out that some of the chairs are faulty, and your client has to purchase new ones.

Embarrassing for you. Upsetting for your client. And a good reason to have professional liability coverage. If your client were to take you to court, your professional liability policy would likely be able to cover the resulting legal fees.

Hi, We’re Simply Business

We help hundreds of sole proprietors to find business insurance, so we know what you’re up against. We can help you understand what type of coverage you may need. And because we work with top insurance carriers, you’ll be able to choose from among the best options for your business.

Plus, with general liability policies starting as low as $21.25/month,* it’s affordable to get the protection your sole proprietorship needs.

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Get an affordable & customized policy in just minutes. So you can get back to what matters: Your business.

As an insurance provider, we know sole proprietorship insurance is a great way to protect yourself from liabilities. As champions of small businesses, we know you want to limit your risk as much as possible. Here are a few other ways to protect your business.

2. Provide your customers with a liability waiver.

If you’ve ever gone to a trampoline park or worked out at a gym, you may have been asked to sign a liability waiver or release form. These are written acknowledgments of the risks involved in what you’re doing and that you agree to accept them. They also often state that you waive your right to sue if you’re injured during the activity.

Even seemingly harmless activities such as using a website or software have some form of waiver, usually in the form of “terms and conditions.”

While a liability waiver offers some protection, it’s generally only for injuries or damages that might happen in the normal course of the covered activity. So if you sprain your ankle on the trampoline, you may not be able to sue.

However, if you slip on a wet floor and sprain your ankle on your way to the trampoline, you might have a case. It’s important to know that states have differing laws regarding liability waivers, and they need to meet certain requirements to be valid. If you choose to use a waiver, it’s a good idea to do some research and consult with an attorney.

3. Consider looking into asset protection trusts.

An asset protection trust (APT) is a legal arrangement to help protect your assets from creditors. As a sole proprietor, you would transfer the title of your assets, such as a vehicle or equipment, to another person. While you still have access to the assets, you don’t legally own them, so your creditors can’t claim them.

An APT can be an effective way to shield the assets of your sole proprietorship, but it’s not the most simple or least expensive option. You’ll likely need an attorney to properly create the trust documents, and you also may have to pay an annual fee to the trustee.

4. Change the title on your property.

If you’re a sole proprietor and you’re married, you may be able to protect your home and other property from claims against your business. This is known by the legal term, “tenancy by the entirety.” It means that both you and your spouse own the property jointly.

Typically, if you get sued as a sole proprietor, or incur a liability, assets held in a tenancy by the entirety are likely exempt.

There are downsides to this option as well. For example, it doesn’t cover debts you and your spouse incur together (e.g., taking out a loan together). There are also certain restrictions and conditions that you need to be aware of and to adhere to.

As with any type of legal consideration, it’s a good idea to consult with an attorney.

5. Form an LLC.

An LLC, or Limited Liability Company, is a way to structure your business. It offers many of the same advantages of a sole proprietorship in terms of business control and tax payments, but with far more liability protection.

Much like an incorporated business, an LLC can protect your personal assets, such as your house, car, cash, and investments. In general, only your business assets can be touched in debt collection or legal claims against your business. In most states, and under most circumstances, your personal assets are shielded against claims.

That protection extends to situations where an employee, business partner, or the business itself is sued for negligence.

Similar to an asset protection trust, forming an LLC requires some fees and paperwork. It’s also a good idea to consult with a legal professional with experience in LLCs.

You can learn more about setting up an LLC by checking out the helpful articles in our small business blog, Simply U.

Do You Have $30K to Spare?

If you’re like most small business owners, probably not. But according to an industry study, $30,000 is the average cost of a customer injury or damage claim for small businesses.

The study also found that four out of 10 small businesses will experience an event that triggers an insurance claim within any given 10-year period.

As we’ve previously mentioned, if you’re a sole proprietor and your business can’t cover that kind of claim, your personal assets could be at risk.

What’s more, even if you win the case, you’re still on the hook for legal fees, not to mention the time and income lost from your normal business activities to deal with the lawsuit.

While many of the options we’ve covered can protect your assets from claims and creditors, no single one gives you complete, iron-clad security. That’s why it’s a good idea to see which ones might work best for your type of business and incorporate them into a solid asset protection strategy.

Making sole proprietorship insurance part of your plan can not only help pay a claim, it also can cover some or all of your legal expenses as well.

Best of all, getting coverage doesn’t have to be complicated, expensive, or take up a lot of your time. For many customers, it’s less than 10 minutes.

We can get you started online right now, or you can call 844-654-7272, Monday through Friday, 8 a.m. to 8 p.m. ET. We’ll be glad to help you get the coverage you need so you have the protection you need.

*Monthly payment calculations (i) do not include initial premium down payment and (ii) may vary by state, insurance provider, and nature of your business. Averages based on July-September 2023 data of 10% of our total policies sold.

Ed Grasso

As a 9-year-old at summer camp, I hated it — especially after being pulled screaming from the pool during the swimming competition. While this left me without an aquatic achievement patch, it also inspired the letter to my parents that got me an early release from Camp Willard. That showed me the power of writing. I’ve done my best to use it only for good ever since, such as writing helpful articles for small business owners.

Ed writes on a number of topics such as liability insurance, small business funding, and employee management.