If you work for yourself, then you likely enjoy the flexibility and freedom that being your own boss gives you. But with an accident or mistake, you could risk the lifestyle you've built being destroyed.
That's where sole proprietorship liability insurance comes in.
We'll review how different types of sole proprietorship insurance can help you continue growing your business to reach your goals, examples of these coverages in action, and what goes into policy costs.
If you run and operate your business by yourself, you're considered a sole proprietor, which means that your business finances and personal finances are considered one-and-the-same. Come tax season, the IRS will process your business's taxes with your personal income tax.
This can be a positive for your business when you're starting out because you don't have to go through the process of creating an LLC.
One downside of sole proprietorships, though, is that any liabilities your business faces could impact your personal assets. That means that if your company gets sued, you risk your personal assets like your house or car being taken away.
That’s why it’s important to protect yourself with business insurance. Business insurance is a type of insurance coverage that includes bundled policies that protect you from different risks and the expensive claims and lawsuits they could result in.
There are two types of business insurance that you may want to consider as a sole proprietor: general liability insurance and professional liability insurance.
They're a couple of the most common types of business insurance policies, so we'll review how they could protect your business.
General liability insurance, also referred to as commercial liability insurance, typically covers third-party:
Having sole proprietorship insurance with general liability coverage can protect you if an event like the ones listed above occurs. You can be as careful as possible, but business owners are only human, and mistakes happen.
Plus, let's not forget that even if you think you've done everything right, a customer can still sue you.
That possibility and risk exists — a report estimated that between 36%-53% of small businesses are involved in a lawsuit in a given year. If your business doesn't have the money to pay for the lawsuit and claim fees, then authorities could go after your house, car, or other assets.
That's because as a sole proprietor, your business liabilities are tied to your personal assets.
With general liability insurance, though, you could be covered for the cost of the claim, up to your policy's limit.
Professional liability insurance is a type of policy that typically covers:
If a claim like those listed above happens, then having sole proprietorship insurance with professional liability coverage can help protect your business.
Let's look at an example. Say you're an accountant helping a client with their annual tax return. You record their income on the paperwork and file their taxes.
Later, they sue you because you recorded their income incorrectly and they now owe fees to the IRS. They're suing you for negligence and request to be paid the cost of the IRS fees and the amount they paid you originally.
Without a professional liability insurance policy, you could have to suffer the cost of the claim out-of-pocket.
Many small businesses don't have large savings for emergencies. Without the money, your house and car could be at risk and used as collateral.
With a sole proprietorship insurance coverage like professional liability, though, you could be covered for claim and legal fees, up to your policy's limit.
Alice has run her accounting firm for several years with increasing success. She's proud of the business she's grown and values the long-term relationships she's worked to build with her clients.
One day, an angry client storms into the office. They claim that Alice and her team were negligent; the client's income was recorded incorrectly, and they now owe a large fee to the IRS. The client is suing Alice for the cost of the fees.
There's no question that dealing with these claims and most likely hiring a lawyer will take time, but having business insurance could help take some of the pressure off Alice's stressful situation.
Alice could use professional liability coverage to help cover the requested IRS fees if she's found at fault, and/or her legal fees, up to each policy's limit.
Even if she's found not at fault, Alice will likely still owe fees to the lawyer who defended her business. Without a policy helping to cover those costs, Alice could owe so much money that she risks losing personal assets (like her house or car) that could be used to cover those fees.
Leonard is working at a customer's house. When Leonard is prepping to leave for the day, the customer trips over the leaf blower that Leonard left laying in the yard, yelping as he falls. When Leonard turns to see what happened, he inadvertently scratches the customer’s car with his toolbox.
The customer twisted his ankle and needs a brace and physical therapy.
Not only is the customer suing Leonard for the cost of the repairs to his car, but he also is suing Leonard for the cost of his medical bills.
When it comes to settling with his customer, having general liability could help to cover the cost of what Leonard owes for his customer's car repairs, his medical bills, and legal expenses too (up to his policy's limit).
Think about what Leonard could owe if he didn't have sole proprietorship insurance.
The fees from the customer's claims alone could easily put most small businesses into financial trouble. Because he's a sole proprietor and all of his business and personal assets are considered one and the same, Leonard could risk losing his personal assets.
Carl has been running his own business for just over a year but has worked as a carpenter for over a decade. He has a great reputation in his community for doing work that's thorough, quick, and to his customers' satisfaction.
He's building a customer's back deck overlooking their award-winning garden. The deck is unfinished, and before leaving one day, Carl cautions his customer against going near the structure because it isn't yet stable.
The next day, Carl's customer calls with the news that they're suing him. The customer didn't follow Carl's instructions and went on the unfinished deck. When descending the staircase, a plank gave way and the homeowner fell and broke his ankle.
The customer is also unhappy because the deck, though they approved its specifications, is now creating shade over a part of the garden that requires a lot of sun. Now the customer's prized flowers may not win the annual “best garden” contest.
The customer wants Carl to pay for his medical bills, as well as fees for the shaded flowers, claiming he was negligent in his work.
A general liability policy could come in handy, as it may cover the cost of his customer’s medical bills. Instead of needing to risk his house or car, Carl could use his policy to help pay medical costs and legal fees related to the claim, up to the policy's limit.
Because Carl's customer also claimed he was negligent, he could use professional liability coverage to protect his business. Whether it's hiring a lawyer to defend his case, paying out a claim, or both, a professional liability policy can help to cover those costs, up to the policy limit.
Hopefully, now you have a better idea of how different types of sole proprietorship liability insurance could help protect your business, as well as your personal assets. But how do you find the right coverage for what you need?
There are a few steps you can take, like checking with other local business owners to learn about their experience and seeing what trade organizations recommend. Finally, you can take the time to understand your options.
With Simply Business, you can compare quotes for free. It doesn't take long (less than 10 minutes), and quotes are generally affordable, with general liability policies starting for as low as *$19.58**.
Click here to start comparing quotes today.
As business owners, it's not uncommon to end work after a long day, only to think about tomorrow's to-do list. How often do you look one week, month, or year ahead?
It's impossible to know what the future may bring for your business, so that's why it's a good idea to control what you can. Having insurance coverage is one way you can be proactive about protecting your personal assets and your business's finances.
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. *
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).
Allison writes on a number of topics such as small business leadership, business structures, and employee training.
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
*Harborway Insurance policies are underwritten by Spinnaker Insurance Company and reinsured by Munich Re, an A+ (Superior) rated insurance carrier by AM Best. Harborway Insurance is a brand name of Harborway Insurance Agency, LLC, a licensed insurance producer in all 50 states and the District of Columbia. California license #6004217.