A sole proprietorship is an unincorporated business owned by one person. Anyone can set up a sole proprietorship, making it one of the easiest and fastest ways to form a company. In fact, the Small Business Administration says 87% of firms without employees are sole proprietorships.
The advantages of being a sole proprietor are that you’re paid directly for your work and you get to keep the profits. A disadvantage is that you must pay for your own health insurance and retirement benefits. You could also be held responsible for property damage or injuries that occur as a result of your work. To protect your personal assets, you need business insurance for property and liability.
Protect yourself from lawsuits
Without proper protection for your assets and reputation, you could find yourself paying a large legal claim or even facing bankruptcy. Luckily, commercial general liability (CGL) insurance covers most of the liability situations you may encounter as a businessperson.
CGL covers claims in three areas:
- Bodily injury and property damage that occur on your business premises, as a result of your operation or from work you’ve done off-site.
- Medical expenses for customers injured on your property (Work-related injuries to you or an employee would be covered under workers’ compensation insurance.)
- Personal and advertising injuries, including copyright infringement, libel, slander, invasion of privacy, use of another company’s intellectual property and misleading advertising claims
For most businesses, CGL is a must. You may even be required to show proof of coverage to obtain a license, bid on a contract or lease a space.
CGL helps with your legal expenses and compensatory and punitive damages if you’re found liable, up to the limits in the policy. For example, a $1 million/$2 million policy would pay up to $1 million for a single claim and up to $2 million during the term of the policy across all claims. Your insurance professional can advise you on the appropriate limits for your type of business.
CGL will not pay for intentional or foreseeable damages. Nor does it cover accidents involving cars, airplanes or boats. For vehicles, you need separate coverage, such as auto liability insurance.
Professional liability and other liability coverages
Commercial general liability insurance won’t protect you from all the types of liability you may face as a sole proprietor. For instance, it doesn’t cover professional liability. If you provide a professional service to your customers, you’re at risk for errors-and-omissions claims.
Professional liability insurance covers errors and omissions, negligence, misrepresentations and nonperformance of professional services. It could cover a claim that you didn’t perform at the level expected of a business of your type, or that you made a mistake that caused a financial loss to your client.
Like CGL, professional liability helps pay legal fees and judgments or settlement costs. Coverage is subject to policy limits and certain exclusions. For example, it won’t cover illegal acts.
Other types of liability insurance you may need include product liability, pollution liability, employment practices liability and cyber liability, depending on your business.
If you’re in a high-risk industry, you may find an umbrella policy is a cost-effective way of increasing the limits on your liability coverages.
Commercial property insurance
Depending on the type of business you operate and where it’s located, you may need commercial property insurance. Commercial property insurance covers the space you lease or own, plus the contents. Contents include furniture, computers, equipment, inventory, office supplies, tools and materials stored on the premises.
Commercial insurance helps when you experience a loss from a fire, wind, hail, lightning, a burst pipe, theft or vandalism. Policies have limits based on the value of your property. And certain perils, such as floods and earthquakes, are excluded. These coverages can be purchased separately.
Talk to your insurance professional about what your homeowners insurance covers if you operate your business from home. Most homeowners policies provide only limited coverage for business-related losses. If you just need to cover office and computer equipment, you may be able to increase your limits through a rider.
Commercial auto insurance
Typically, vehicles owned by a business must be covered by commercial auto insurance. However, as a sole proprietor, you may be able to use a personal vehicle for business purposes on a limited basis and still be covered by your personal auto insurance. Check with your insurance professional about what kind of coverage you should have. For example, do you regularly:
- Make visits to clients?
- Drive from one job site to another?
- Pick up customers or packages?
- Transport tools or equipment?
- Deliver food or other goods to customers?
If so, you may need business auto insurance or non-owned auto insurance. If you’re a contractor who transports materials, equipment or tools to job sites, you may need inland marine insurance. Inland marine covers property while it’s in transit, which commercial property insurance does not.
Workers’ compensation and disability income
Self-employed individuals are generally exempt from state workers’ compensation requirements. However, sole proprietors may voluntarily purchase coverage for themselves.
If you don’t have workers’ compensation, you might consider buying a disability income insurance policy. Disability insurance pays an income replacement benefit if you become disabled. You can often purchase it with life insurance.
Life insurance is an important succession planning tool; when a sole proprietor dies, the business ceases to exist. If your family depends on your income or if you have loans that need to be paid, a life insurance policy is a good way to fund those obligations.
BOPs provide several coverages in a single policy
You may find it’s more economical to purchase the insurance you need in a bundled policy known as a business owner’s policy (BOP). Most commercial carriers offer BOPs or program policies designed to meet the needs of particular businesses or professions.
A standard BOP contains three types of insurance: general liability, commercial property and business income. Business income is tied to your property insurance. If a covered property loss results in business interruption, the policy replaces your income on a temporary basis.
BOPs usually don’t include commercial auto or professional liability insurance, so you’ll need to purchase those separately. An insurance professional who knows the small-business market can help you decide if a BOP is the best choice for you.
Starting a business can be a challenge, so working with an agent who can take care of all your insurance needs makes sense. It’ll give you peace of mind and allow you more time to acquire customers, run your business and do what you love.