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Do You Need Sole Proprietorship Insurance? Here's How to Tell

6-minute read

Carpenter at work, wearing ear protection and tool belt.
Allison Grinberg-Funes

Allison Grinberg-Funes

1 July 2021

If you're a business owner running a company on your own, you may know to mark "sole proprietor" when filing your taxes, but do you need sole proprietorship insurance?

In this article, we'll cover the 4 biggest signs you need insurance for your business, what it costs, and how to find the right coverage for your small business.

Let's go!

The 4 Biggest Signs You Need Sole Proprietorship Insurance

1. Your business activities carry risk.

It's not uncommon for solo business owners to think that because they work on their own and are responsible only for themselves and their work, that they're foolproof.

While having a sole proprietorship gives you a good amount of control over your business, you can't control everything. There's the chance of human error, as well as incidents that are out of your control.

You aren't alone in facing the risks — 43% of small businesses surveyed reported being threatened or involved with a civil suit. You don't even have to be found at fault to be involved in a lawsuit. Even if you're found not at fault, you could potentially end up owing hefty lawyer fees.

There are two types of sole proprietorship insurance that you may want to consider for your small business: general liability insurance and professional liability insurance. Having a business insurance policy can help protect your business from potential risks, including those large legal fees.

General liability insurance

General liability insurance, also referred to as commercial liability insurance, is sole proprietorship coverage that helps protect business owners against:

  • Bodily injury
  • Third-party accidents
  • Property damage
  • And more

You may be curious about how general liability coverage could benefit a business owner.

Let's look at an example:

Say a landscaping company is working to tidy up the lawn of a historical estate. The landscaper is doing the work by themselves and the customer is pleased with the work so far. Then, at the end of the week, one of the estate staff members trips over the landscaper's tools and sprains their ankle.

The customer sues the landscaper for the cost of the staff member's medical bills, and it's up to the sole proprietor to pay for a lawyer to defend their business, as well as the medical bills.

Without general liability coverage, these fees could set the landscaper back financially, and they may be forced to pay out-of-pocket.

With sole proprietorship liability coverage, though, the landscaper could use the insurance policy to help cover the cost of both the staff member's medical bills and their lawyer fees, up to the policy limit.

Professional liability

Professional liability insurance is sole proprietorship coverage that helps protect business owners from:

  • Negligence and alleged negligence
  • Copyright infringement
  • And more

Let's look at an example of this type of sole proprietorship liability insurance in action:

An accountant helps a client file their annual taxes. The client is pleased with the accountant's work, but several months later, the client sues the accountant.

They were audited by the IRS and owe a large sum of money. The client is suing the accountant for the IRS fees, claiming their mistake resulted in the audit.

Without sole proprietorship insurance with professional liability coverage, the accountant may be required to pay the requested IRS fees. Beyond those payments, they'll likely have to pay for a lawyer to defend their business. Since they're a sole proprietorship, all of the money will come out of their personal accounts.

With sole proprietorship liability coverage, their policy could likely help to pay the client’s IRS fees, as well as the lawyer fees.

Each of these small business owners in these examples likely didn’t expect their jobs to come with these risks, but their customers still sued them.

If you have a sole proprietorship and your business is connected to your personal bank accounts, you could be putting your personal assets at risk — not to mention your credit score. Without money in the bank to protect you, a lawsuit could cause your client to go after things like your house and car.

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2. You want to gain the trust of your customers.

Starting out as a small business owner can be tough. It feels like you're a rollercoaster car inching up to the top of the ride.

Before you can hit your stride and coast downhill, you'll need customers. You know what kind of person you are, how good you are at your profession, and how you run your business, but first-time customers don't.

Sole proprietors often have to do some extra work to build relationships with potential customers, and focusing on trust can go a long way. One way to do that is by getting sole proprietorship insurance.

And by showing a Certificate of Insurance, either in your storefront or on your website, you're letting potential customers know that you've taken the extra step to protect the work you do for them.

3. You have personal assets to protect.

Do you own a home or car? What about other assets, like family heirlooms or rental properties?

If that's the case, or if you aspire to own these things, then sole proprietorship insurance may be a wise choice for you to have.

Here's why:

Remember those scenarios we discussed about the landscaper and the accountant? Well, if those small business owners hadn't been insured, they could've risked losing their assets.

After all, the average customer injury damage claim rings in at $30,000.

Many sole proprietors don't have that kind of money set aside for business expenses. But they may have their money tied up in their valuable assets. Without business insurance, they are risking losing these assets.

4. You work from home.

Do you work from home? One of the benefits of running your business on your own is that you can work from anywhere, including a home office.

While many may have homeowner's insurance, those policies may not cover home offices. So if your home office is damaged in some way, or important equipment or items are stolen, your business may not be protected.

In this case, a type of sole proprietorship liability policy you may consider is home-based business insurance. Even if you don't work from your home full-time, you still may need home-based business insurance.

How to Get Sole Proprietorship Insurance

Now that you see 4 reasons you need sole proprietorship insurance, how do you go about finding the coverage that best suits your business's needs?

Like any big business decision, researching before making a purchase decision can give you an idea of what policies are available to you. This article is just one step on your research journey. Here are some other steps you can take to explore your coverage options.

Talk to other business owners. There are over 23 million sole proprietors in the United States, so there are plenty of business owners you can talk to. Whether it's someone in your industry or in your local community, ask other business owners about their experience with business insurance and how they chose their policy.

Understand all your risks. Each business is different, meaning that each business is exposed to different risks. Take some time to research the risks your profession may have. This way, when you're shopping for coverage, you can make sure you're considering policies that protect you from all or most of the potential risks or incidents.

Compare quotes. You likely wouldn't buy the first car you test drive, and shopping for sole proprietorship insurance should be no different. Take time to compare different policies with varying coverage options.

To compare quotes, you can use Simply Business's free quote comparison tool here.

The great thing about the quotes you'll see is that they're typically affordable. For example, general liability insurance policies start as low as $25.95/month *. So for less than your monthly coffee runs, you can protect your business.

Sole Proprietorship Has Your Back

As a sole proprietor, you're often working alone. For many, this is one of the advantages of being a small business owner. It offers you flexibility and freedom to run your company how you choose.

But it also means that if something happens, you don't have business partners or employees to support you. Sole proprietorship insurance can help support and protect your business when you need it.

Getting business insurance is just one step you can take to protect your business. To learn more about how to protect and grow your business over time, visit Simply U, our blog for business owners.

* 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 January - December 2020 data of 10% of our total policies sold.

Allison Grinberg-Funes

Written by

Allison Grinberg-Funes

I’ve told stories since I learned to talk and written since I could hold a pen. As a small business owner myself - I'm a freelance writer and yoga teacher - I love contributing to the entrepreneurship community in different ways (including writing for Simply Business!). When I’m not drafting articles for SB, I can be found on my yoga mat, perusing an indie bookstore, and writing (with my cat nearby of course).

This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer

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