Do Sole Proprietors Need Business Insurance?

While sole proprietors enjoy complete ownership over their businesses, they also suffer from unlimited personal liability. Unlike an LLC or corporation, your personal assets like your home and savings are completely vulnerable if you have business debts and legal claims. Fortunately, having the right sole proprietor business insurance can help mitigate your losses.

On This Page

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  What Is a Sole Proprietorship?

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  Why Is Insurance Important for a Sole Proprietor?

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  What Types of Business Insurance Does a Sole Proprietor Need?

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  How Much Does Insurance Cost for a Sole Proprietor?

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  How Do I Get Insurance for My Sole Proprietorship?

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  FAQs

What Is a Sole Proprietorship?

As the name suggests, a sole proprietorship refers to an unincorporated business owned and operated by a single individual. It is one of the simplest and most common business structures, with nearly 28 million individual tax returns reporting sole proprietorship activity in tax year 2019.^[1]

A sole proprietorship differs from a limited liability company (LLC) or corporation in terms of legal structure and liability. Unlike a sole proprietorship, an LLC or corporation is a separate legal entity from its owners, providing a level of personal asset protection. Generally, this means that their personal assets are generally not at risk in case of business debts or legal claims.

Why Is Insurance Important for a Sole Proprietor?

Insurance can help protect a sole proprietor’s personal assets. Since there is no legal distinction between a sole proprietor and their business, the sole proprietor has unlimited personal liability for any debts or legal obligations. In the event of a lawsuit, your personal assets like your savings accounts and house are on the hook. Insurance can help safeguard against catastrophic losses and pay for high-cost claims.

Insurance ensures the sole proprietor stays legally compliant. Certain types of insurance may be required by law such as commercial auto insurance if you own a company car. In addition, workers’ compensation is mandatory if you employ as few as one employee in certain states.

Insurance can be useful for attracting business. Sole proprietorships are typically smaller businesses and having insurance can give you a leg up over the competition.

Potential clients or customers may prefer working with a professional who is not only licensed or certified but also insured.

What Types of Business Insurance Does a Sole Proprietor Need?

While the specific insurance needs may vary depending on your industry and individual circumstances, there are several recommended types of business insurance for a sole proprietorship.

General Liability Insurance

General liability insurance protects sole proprietors against third-party claims for bodily injury, property damage or personal injury. For example, if a mobile massage therapist accidentally knocks over an expensive vase inside their client’s home or spills massage oil that causes them to slip and break their elbow, this policy would pay for the damages and injuries.

In addition, general liability insurance would pay for the sole proprietor’s legal fees if either claim escalated into a lawsuit. Accusations of defamation should be covered as well.

Commercial Property Insurance

Commercial property insurance safeguards your business property, such as equipment, inventory or office space, against perils like fire, theft, vandalism and certain natural disasters. For example, it would pay to repair or replace a handyman’s tools if they were destroyed in a fire. Even if you operate a home-based business and don’t lease an office or warehouse, you may still have equipment, computers and inventory you’ll want to insure.

Professional Liability Insurance

If you offer professional services or advice such as consulting, coaching or accounting, then professional liability insurance (also known as errors and omissions insurance) is crucial. It protects you in case a client alleges financial loss or damages resulting from your professional services or advice.

For example, if a marketing consultant is sued for recommending an unsuccessful marketing campaign rooted in outdated practices, then this policy should cover their legal defense costs.

Additional Coverages To Consider

Sole proprietors may also want to consider the below types of coverage depending on their business’s unique risks:

• Business owner’s policy: If you want to bundle general liability, commercial property and business interruption insurance at a discounted price, consider buying a business owner’s policy (BOPs). BOPs can often provide convenient and affordable insurance for sole proprietors.
• Cyber liability insurance: Cyber liability insurance protects against data breaches, cyberattacks or unauthorized access to sensitive client information.
• Commercial auto insurance: If you drive a vehicle for business purposes, such as transporting tools, equipment or materials, then you’ll want to buy commercial auto insurance. Keep in mind that your personal auto policy does not cover accidents that occur while driving for business use.
• Workers' compensation insurance: While sole proprietorships are often single-person businesses, these business owners may sometimes employ workers. If they employ the minimum number of employees set by their state, then workers’ compensation insurance is mandatory.
• Product liability insurance: Essential for businesses that manufacture or sell physical products, product liability insurance will protect against claims resulting from a customer using your product.

How Much Does Insurance Cost for a Sole Proprietor?

The cost of insurance for a sole proprietorship can vary considerably based on its size, industry and the company they purchase from. To provide some type of benchmark, most customers who shop with NEXT Insurance pay $45 per month for general liability insurance, at least $200 for commercial auto insurance, $45 for commercial property insurance and $45 for professional liability insurance.^[2][3][4][5]

Combined into a single policy, a sole proprietor is looking at $335 per month or $4,020 per year for business insurance.

Of course, the actual cost of sole proprietorship business insurance is based on multiple factors, namely what coverage you buy. For example, if you operate a hair salon from inside your home, then commercial auto insurance may be an unnecessary expense you can cut. Similarly, if you’re not selling a physical product like clothing or a supplement, then you would not need to incur product liability insurance costs.

Other key factors that can affect the cost of your premium include:

• Type of business: Industries with higher inherent risks, such as construction or healthcare, may generally have higher premiums compared to lower-risk sectors.
• Business size and revenue: Larger businesses may have higher premiums due to increased exposure and higher potential liability.
• Location: Factors such as local laws, regulatory requirements and regional risks can affect insurance pricing.
• Claims history: If you have a history of business insurance claims or operate in a high-risk industry, insurers may view you as a higher risk and charge higher premiums.

How Can I Save Money on Business Insurance?

Business insurance coverage can sometimes be costly and you’ll want to save every cent possible, especially if it’s a new business. Many insurance companies offer discount opportunities to attract business, such as a bundle discount if you buy multiple types of insurance. In addition, consider increasing your deductible to lower your monthly premium.

Also, don’t forget to shop around. Insurance companies have different methodologies for calculating rates and your qualifications may snag you a cheaper rate at a different company for the same level of coverage.

How Do I Get Insurance for My Sole Proprietorship?

Obtaining insurance for your sole proprietorship is a straightforward process that can be accomplished by following these steps:

1. Evaluate the specific risks associated with your business: Consider factors such as the nature of your services, the industry you operate and the potential liabilities you may face. This assessment will help you determine the types and levels of coverage you require.
2. Look for reputable insurance companies: Seek out providers with experience in your industry, as they will better understand your unique needs.
3. Obtain multiple quotes: Reach out to multiple insurance providers and request quotes based on your specific coverage requirements. Alternatively, you can use an insurance marketplace like SmartFinancial that will compare multiple quotes for you to match you with a policy.
4. Review the policy coverage and terms: Carefully review the coverage details, policy limits, exclusions and deductibles offered by each insurance provider.
5. Purchase and maintain coverage: Complete the necessary paperwork, pay the premiums and secure the coverage. It's important to regularly review your insurance needs and update your coverage as your business evolves.