As a sole proprietor, you need business insurance to protect your personal and business assets in case of a lawsuit or other risks. Some insurance packages available to sole proprietors are general liability insurance, commercial auto insurance, and so on. We’ll look at these insurance coverages in this article and how you can protect your business from liability.
Does A Sole Proprietor Require Business Insurance?
A business insurance policy covers you if someone sues you for causing damage to their property, injuring them, or harming their reputation. Ensuring you have the correct forms of insurance as a business entity can be just as crucial as having a solid business strategy and obtaining the financial resources you need to run your organization. That said, here are some of the forms of business insurance you’ll require as a sole proprietor
#1. General Liability Insurance
For basic business liability protection, consider a sole proprietor insurance policy, such as general liability insurance.
General liability insurance covers, in addition to the traditional “slip and fall” protection it provides against third-party bodily injury, the following:
- Property damage caused by a third party (to someone else’s property)
- Product liability (in the event that you are sued for a product defect)
- Advertising harm (if someone sues you over something you publish)
#2. Business owner’s policy
A business owner’s policy, often known as BOP insurance, combines general liability and commercial property insurance into a single low-cost package.
BOP insurance combines a wide range of benefits into one policy, including legal fees and other costs associated with:
- Lawsuits filed by customers
- Lawsuits for defamation
- Replacing any lost or damaged commercial property
- Income replacement when a company’s stolen or damaged property causes it to cease operations.
#3. Errors and Omissions Coverage
Professional liability insurance, often known as errors and omissions insurance, is frequently utilized by people in professional services such as accountancy, information technology, consulting, and real estate. If someone sues you for professional blunders, for instance, E&O insurance can help pay for lawsuits and court settlements. E&O can also cover you in the following cases:
- Missed deadlines
- Incomplete work
- Breach of confidentiality
Some insurance carriers will allow you to add an intellectual property infringement rider to an E&O policy. In the event that they are accused of infringing on someone else’s intellectual property, many consultants and other professionals include this as part of their professional liability policy.
#4. Workers’ compensation insurance
When you hire employees, you may be obliged by law to have workers’ compensation insurance. That way, if an employee is injured on the job, workers’ compensation will cover the costs. It could, for example, help pay for:
- Medical expenses
- Continued care
- Unpaid wages
Every state has its own standards, and some do not require worker’s compensation coverage until a particular number of employees are reached. Most states require coverage as soon as you hire your first employee.
Before hiring someone, be sure you understand the laws in your state. Keep in mind that some states require workers’ compensation even if you don’t have any employees, especially if you work in the building trades, so sole proprietors should think about it even if it isn’t required.
#5. Commercial auto insurance
Most states require commercial auto insurance for firms that own automobiles. If you use a personal or rented vehicle for work, you should consider hired and non-owned auto insurance (HNOA), because your personal vehicle insurance will not cover you if you use your own vehicle for work.
Commercial auto insurance protects your company’s automobiles, trucks, and other vehicles. It covers your liability fees if you damage someone else’s vehicle, as well as related medical expenditures and physical damage caused by theft, vandalism, and storms.
Hired and non-owned auto insurance provide liability coverage for accidents involving any personal vehicles used for business purposes. Your personal auto insurance would most certainly cover you while driving to and from work, but not when making deliveries, picking up supplies, or doing other job-related activities. HNOA insurance can also cover the liability charges for any vehicles rented by your company.
Remember that HNOA insurance does not cover incidents on your commute, personal errands during office hours, or physical damage to your own car.
HNOA insurance can be purchased as a standalone policy or as a rider to your general liability insurance.
How to Get Sole Proprietorship Business Insurance
Sole entrepreneurs can obtain business insurance directly from an insurance company or through an insurance marketplace or third-party broker. Before making a decision, obtain numerous quotes from various business insurance carriers.
Consider the following while comparing quotes:
Policy protection: Business insurance coverage is frequently very similar from one provider to the next. However, pay special attention to exclusions, supplementary coverages, and endorsements to see if there are any significant discrepancies.
Liability limits: The per-occurrence limit is the most the insurance company will pay out for each claim, while the aggregate limit is the most the company will pay out over the course of the policy term. A higher limit may be required for larger or riskier businesses.
Price: Compare policy premiums and deductibles, which are the amounts you must pay out of pocket before your insurance kicks in. Lower premiums are frequently accompanied by greater deductibles, which means you’ll pay less monthly but more in the event of a claim.
After you purchase your insurance policies, make sure you understand when your payments are due and how to manage your coverage, such as filing a claim, adding endorsements, or obtaining a certificate of liability insurance.
Annually, review your commercial insurance policy. When it comes time to renew your insurance, consider how you feel about the coverage, costs, and customer service you’re receiving, as well as any new dangers you’ve encountered. That way, you’ll always have the correct coverage for your company.
What Is the Cost of Liability Insurance for a Sole Proprietor?
Sole proprietorships can refer to a wide range of different sorts of enterprises. So, there is no fixed cost for sole proprietorship insurance because it is determined by various factors, including your:
Risk exposure: Industries that face more risk will pay more for insurance.
Location: If you reside in a high-crime region, your insurance rates may be higher.
Coverage limitations: The higher your insurance limits, the more you will have to spend for coverage.
History of insurance claims: In general, the higher your rates will be, the more claims you’ve had in the past.
Unlimited Personal Liability
While the benefits of having complete and uninterrupted control over the firm may appear appealing, the main disadvantage is that as the business owner, you are personally liable for all obligations that the business incurs.
Note
In a sole proprietorship, there is virtually no legal distinction between the owner and the business, which means that authorities such as the IRS and the state government do not regard your commercial activities to be separate from your personal dealings.
In other words, creditors of the business owner or the firm itself, as well as any other entity or individual with a claim against the owner, have access to both the business and the owner’s personal assets.
Ways to Avoid Liability in a Sole Proprietorship
As a business owner, no one wants to face devastating financial consequences as a result of obligations that could have been avoided. Here are some strategies for avoiding such liabilities.
#1. Purchase Insurance
There is business liability insurance that can completely shield a sole proprietor from issues like lawsuits that could derail the business and deplete personal assets. While it may be a pricey alternative, particularly for small business owners, it can protect sole proprietors against a variety of financial disasters.
#2. Keep Your Home Safe from Liability
In many cases, a person’s home is his/her most prized asset that would be targeted if a massive liability claim arises. With this in mind, protecting your home from liability that revolves around operating a sole proprietorship business would be the first priority.
Note
If you are married, you should consider altering the title of your home so that you and your spouse are tenants in entirety.
It would imply that the property is split 50/50. It would then effectively prevent creditors from enforcing a lien on the property because the debts due only apply to you as the sole proprietor of the firm and not to your spouse.
Unmarried sole proprietors, on the other hand, can explore co-owning the home with someone other than a spouse, such as your father. Keep in mind that this rule varies based on the laws of each state.
#3. Work with Independent Contractors
Most business rules hold a sole proprietor harmless for damages or negligent conduct committed by independent contractors. In this sense, instead of hiring employees, a lone entrepreneur can consider hiring the services of an independent contractor. Keep in mind, however, that this rule may differ from state to state, particularly where irresponsible activities are involved. In California, for example, sole owners can be held liable for a contractor’s carelessness if the job for which they hire the contractor is inherently dangerous.
#4. Establish an LLC.
While any of the aforementioned methods can safeguard a sole owner and his or her firm from responsibility, the most successful and cost-effective method is to effectively convert the business from a sole proprietorship to a Limited Liability Company (LLC).
An LLC provides various advantages not just to the firm but also to you as the business owner. It allows you to separate your commercial entity from your personal activities, which means creditors cannot seize your personal assets to meet the corporation’s liabilities.
In Conclusion,
As a sole proprietorship grows, a business insurance policy such as general liability insurance and commercial auto insurance becomes essential. This helps protect your business from potential lawsuits and associated risks. With the various options of business insurance policies available, we hope you pick the one that best suits you!
Frequently Asked Questions
What is the liability of sole proprietorship
The sole proprietor has unlimited liability.
How much is business insurance in BC?
Business owners in BC will spend between $300 and $1691 on average for insurance.
Does umbrella insurance cover sole proprietorship?
A solo proprietor can be protected by an umbrella policy from defamation and customer claims.
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