Do I need business insurance for a sole proprietorship?

Why sole proprietors carry the full risk

The SBA explains that a sole proprietorship does not create a separate business entity, so your business assets and liabilities are not separate from your personal ones. In its comparison of business structures, the SBA lists a sole proprietorship as having unlimited personal liability, while LLC owners are generally not personally liable.

In practice, that means a lawsuit against your business is a lawsuit against you. NEXT notes that an uninsured sole proprietor may be personally responsible for legal defense costs, medical bills from customer injuries, property damage claims and settlements. Defense costs alone can be significant even when a claim has no merit, and liability policies typically pay for that defense.

You also become a sole proprietor automatically. The SBA says you are considered one if you do business activities without registering as another kind of business, so a freelancer, handyman or side-gig seller with no paperwork is already in this position.

When a sole proprietorship is required to have insurance

Legal requirements depend on what you do and where, not on your business structure. These are the situations that most often make coverage mandatory, whether by law or by someone you want to do business with.

Workers’ comp for a sole proprietor

Workers’ compensation laws are written for employees, and the owner of a sole proprietorship is not one. Massachusetts states the general rule plainly: a sole proprietor is not required to get coverage, but any employees must be covered. Insureon likewise says a sole proprietorship without employees typically isn’t required to carry it, while noting that some states, such as Florida, require certain contractors to have it even with no one else on payroll.

Two things push solo owners to buy it anyway. Clients in higher-risk fields such as roofing and construction often require proof of workers’ comp from everyone on site. And Insureon points out that most personal health insurance policies exclude work-related injuries and illnesses, so workers’ comp may be the only policy that pays your medical bills and lost wages after an injury on the job.

If you only need a certificate to satisfy a client, Insureon describes minimum premium or “ghost” policies in some states as a lower-cost way to show proof of coverage. Also check whether your state can hold you responsible for subcontractors you hire; Insureon notes that in some states you may be required to provide coverage for them.

Which policies sole proprietors usually start with

There is no single “sole proprietor policy.” As NEXT puts it, coverage is usually a combination of policies chosen for your industry and risks. Insureon publishes averages based on the median premium paid by about 100,000 of its customers, which gives a realistic starting point.

What sole proprietor insurance costs

For many solo businesses, general liability is the first and least expensive policy. Insureon reports an average of $45 a month, or $538 a year, for general liability, and $83 a month, or $990 a year, for a business owner’s policy. Most of its customers choose a general liability limit of $1 million per occurrence.

Your own price can be far higher or lower. Insureon says sole proprietors often qualify for discounts, with premiums driven by your profession, business income, limits and deductible. NEXT adds location, years in business, number of employees, claims history and the number of work vehicles. A home-based bookkeeper and a solo roofer are both sole proprietors, but they will not pay anything like the same amount.

How to get covered without overpaying

The goal is to buy what the law and your contracts require, then add the protection your actual risks justify.

• Start with the requirements: read client contracts and your lease for the exact policies, limits and wording they ask for before you get quotes.
• Match limits to the contract. A $1 million per-occurrence general liability limit satisfies many clients; buying far more than anyone asks for raises the premium.
• Bundle when it fits. If you own equipment or inventory, a business owner’s policy usually costs less than general liability and property bought separately.
• Use a minimum premium workers’ comp policy if you only need a certificate and your state allows one.
• Tell your auto insurer if you drive for work, so a claim isn’t denied for undisclosed business use.
• Compare several insurers for the same coverage. A broker such as Florin can compare quotes from several insurers in one review.