Do you know how many fellow sole proprietors you have today in the US? It is a staggering 25 million, which constitutes over 70% of businesses in America! Quite a number, isn’t it? The popularity of this structure type can be attributed to its simplicity. But however simple, if you are a sole proprietor, it is smart to ask certain questions regarding your firm and its insurance! They actually help you stay safe and be prepared. Some of them can be, does my firm come in the sole proprietorship category? Do I need business insurance if I’m a sole proprietor? And so on…
Let’s clear the fundamental misconception before we start the article. Your personal insurance doesn’t cover you if you are a sole proprietor. But please read on to know which insurance policies you do need to cover the risks associated with your business. So, let’s discuss how to make a sole proprietorship safer with the help of insurance.
What Is A Sole Proprietorship?
Many times people don’t even know they are a sole proprietorship! For example, a plumber or Etsy freelancer or a freelance journalist, etc., everybody of these who have registered their firm are examples of sole proprietorships. Talking legally, all of you who are sole owners of their registered firm and are solely responsible for your firm’s profits, debts, taxes, legal liabilities, and business assets are sole proprietors! Feels good to be the one in charge of all your business, right?
But here is the catch, unlike structures like corporations and LLCs, sole proprietorships do not shield their owners. There is no difference between the firm and the owner. So, if something good occurs, kudos to the owner, and if something fatal happens, again, the owner is held liable. The owner even risks losing all his personal assets to the business!
But if you are someone who wants to set up his firm quickly and without many legal complications and fees, you must go for this option. You can really be done setting up your firm (legally) within a matter of a few hours!
Let’s see some pros and cons of setting up a sole proprietorship!
The 5 Cons Of Owning A Sole Proprietorship!
- Sole proprietors do not have an option to go for public funding. Meaning they cannot list their shares in the stock market.
- They are also not applicable for unemployment benefits if the business fails.
- In a sole proprietorship, the business is from the owner and the owner from the company. They are one. So, if the founder dies or gets disabled, the business might end as well.
- Taking the above point forward, a sole proprietorship is closely connected to its owner. So, it is hard to sell it because if the founder stops working in it, the essence and value of the business are usually gone.
- Lastly, and most importantly, everything in the business is the owner’s responsibility. So, if anything fatal occurs, maybe an employee accident or a suit against the company, the owner risks losing all its personal assets.
Due to this very reason that he has no cover from the business’s issues, having insurance is all the more important for a sole proprietor. But a sole proprietorship is not that bad either. Here are a few very convincing pros!
The 6 Pros Of Owning A Sole Proprietorship!
- It is easy and cheap to set up and operate.
- All the power is yours. You are the only decision-maker, and you have no dependency on board members and corporate officers.
- Filing taxes is a breeze. You can file it on your personal tax return, whereas corporations can’t.
- You also don’t need to pay the state unemployment taxes.
- Sole proprietors can mix their personal and business assets.
- How to invest the profit is the owner’s take alone. The keep and invest ratio is yours to decide.
So, now that you have a clear idea about a sole proprietorship, here are the risks and the corresponding insurances you need to buy to stay protected!
The Risks And Insurances You Need As A Sole Proprietor!
#1: You Get Sued
If, say, your client gets hurt on your business premises, and he sues you, your personal liability would not protect you.
You would need a general liability insurance policy, business owner’s policy, errors and omissions insurance, or the best professional liability insurance.
Whichever policy you choose, the essential covers you need to look for in a liability policy are,
- Property Damage
- Bodily Injury
This way, the insurance company pays you for the lawsuit filed against you and any damage to the client’s property and medical bills.
#2: Your Property Is Damaged
Say if your property is damaged for any reason, insurance is there to pay for it. You do not need to go broke repairing your office!
Commercial property insurance and business owner’s policy are two great insurance policies that cover this peril.
Please look for theft and fire as the two main covers in this policy.
#3: You Suffer A Major Business Loss
Suppose your business suffers from fire, theft, or vandalism and is forced to shut down. Commercial property policy etc. will pay for property damage, but you still need to pay wages, newly rented office, etc.
Business Interruption Insurance pays you for all this.
Some covers you need to look for in this policy are,
- Lost Revenue
- Employee Wages
- Rent or Lease Payments
- Relocation Costs
- Even taxes and Loan Payments!
#4: A Worker Is Hurt On Business Premises
If a worker is hurt on business premises, you need to break the bank for compensation and medical bills. Workers’ Compensation Insurance covers the situation.
Some covers you should look for in this policy are,
- Workers’ medical bills
- Their lost wages
- Their funeral expenses
- Their disability benefits
#5: You Deliver An Errored Service
Say you are a legal consultancy and delivered a piece of bad advice that led to losses to your client. A similar situation can occur in an accounting firm. If any such instance happens and your clients sue you, you need coverage for the legal costs.
Errors And Omissions Insurance does the deal. This policy covers the following faults,
- Work mistakes and oversights
- Missed deadlines
- And negligence accusations
- Any service you did not deliver
#6: Your Company-Owned Vehicle Meets An Accident
Your business owns an employee-driven van for making deliveries, but unfortunately, it met with an accident.
Now, you need to pay for the employee’s medical bills, property damage, and legal costs in case of a suit. The commercial auto policy saves the day.
A few covers to look for in such a policy are,
- The liability costs
- Driver’s medical costs
- Accidents when the other motorists are uninsured
- Physical damage and collision
#7: You Exceed Your Liability Limits
Lastly, what if there is a massive lawsuit against you that your existing policies cannot take care of? Commercial Umbrella policy is an add-on to your existing liability policy.
Covers to look for in this policy are,
- Legal costs
- Judgments and settlements
- Other property’s damages
- Medical bills
In A Nutshell…
So, finally, the answer to the question, do I need business insurance if I’m a sole proprietor is, a big YES!
Yes, you do need to have insurance to shield you from all the mishaps that can cause your business heavy losses or even discontinuity. Some must-haves insurances are business owner’s policy, commercial auto policy, worker’s compensation if applicable, and business interruption if applicable. I do believe proper insurance cover must be seen as an investment rather than an expenditure. So, I hope that I could answer the question that do I need business insurance if I’m a sole proprietor to the best extent possible and that you found it helpful!
What are your thoughts? Which insurance would you like to buy? Do tell me in the comments! I am all ears!