As a sole proprietor, you must shield yourself from lawsuits, property damage, legal fees, and other losses and liabilities.
If you’re wondering what small business insurance to purchase as a sole proprietor, we’re here to help. Our guide answers your questions about the importance of business insurance for sole proprietorships and provides you with the information you’ll need to better protect your business.
Recommended: Next Insurance.
Do I Need Business Insurance for a Sole Proprietorship?
In a sole proprietorship, a business owner doesn’t have legal separation from the business. This means that a sole proprietor's personal and business assets are exposed to liability and creditors. As a sole proprietor, you are responsible for all associated debts, taxes, and legal liabilities of the business.
Most sole proprietors should form an LLC to protect their personal assets – only low-risk hobby businesses should operate as a sole proprietorship.
Forming an LLC or corporation legally separates a business owner’s personal assets from the liabilities of the business. But, even an LLC or corporation would still need business insurance to protect their business assets.
That said, business insurance is more important to sole proprietorships than any other business structure. Without business insurance, both your business and personal assets are at risk.
General Liability Insurance for a Sole Proprietorship
The most common and comprehensive type of business insurance policy is general liability insurance.
Some of the risks general liability insurance covers are:
- Bodily injury
- Property damage
- Medical payments
- Legal defense and judgment
- Personal and advertising injury
We recommend general liability insurance for sole proprietors as the first line of defense against a variety of the most general and commonly occurring claims.
How Much Does Insurance Cost for a Sole Proprietorship?
It’s estimated that small businesses pay anywhere from $14–$124/per month for insurance coverage.
When it comes to the cost of insuring your sole proprietorship, the total will vary depending on a number of factors, such as:
- The kind of work you do
- Where your business is located
- How long you’ve been in business
- Your claims history
- The vehicles you use for work
- Your coverage limits
- Where work is performed (e.g., on-site vs. off-site)
The best way to know the cost of business insurance is to get an instant online quote.
Check out our review of the best online business insurance providers.
Types of Sole Proprietorship Insurance
As a sole proprietor, your best coverage will likely be a combination of policies catered toward your particular business. The following types of sole proprietor insurance are some of the most common and most beneficial:
- General Liability Insurance
- Business Owner’s Policy
- Professional Liability Insurance
- Business Income Insurance
- Cyber Liability Insurance
- Commercial Auto Insurance
- Workers’ Compensation Insurance
General Liability Insurance
General liability insurance is a type of commercial business liability insurance policy that protects a sole proprietor from the financial burden of claims arising from bodily injury, personal injury, or property damage. Risks typically covered by this policy include medical payments (resulting from accidents on your premises), personal and advertising injuries (such as libel, slander, copyright infringement, and invasion of privacy), and legal defense and judgment.
Business Owner’s Policy
A business owner’s policy (BOP) isn’t a specific type of insurance. Instead, it is a packaged group of policies that protect against the most common liabilities faced by businesses. As a sole proprietor, you are vulnerable to a wide range of risks, making it worthwhile to have a wide range of coverage.
A business owner's policy typically includes general liability insurance, commercial property insurance, and optional business interruption insurance. Business owners are able to tailor policies to their particular needs.
Professional Liability Insurance
Also known as errors and omissions insurance (E&O coverage), professional liability insurance protects sole proprietors against claims of inaccurate, negligent, or undelivered work. If you provide professional services or expert advice to clients, this coverage is crucial. With professional liability insurance coverage, your sole proprietorship will be protected from risks like inaccurate work, malpractice, misrepresentation, undelivered results, and personal injury.
While professional liability insurance covers a variety of liabilities, it does not cover them all. Many liabilities not covered by an E&O policy fall in the territory of general liability insurance. Together, these two insurance policies create a strong base of protection for sole proprietors.
Business Income Insurance
Business income insurance, also known as business interruption insurance, protects sole proprietors against income loss in the event of a disaster. If your business is unexpectedly forced to shut down, it’s important to know you can rest assured you won’t lose your entire income.
Typically, business income insurance covers common events like fire, wind damage, ice or hail, theft, and vandalism. Business Income coverage will help pay for expenses such as earned profits (based on past financial assessments), temporary location, and fixed costs (like property taxes and lease payments).
Cyber Liability Insurance
Cyber liability insurance is a form of specialty insurance coverage that protects your business' liability against technological risks like data breaches and cyber-attacks. Cyber crimes can not only take out your computer systems, but they can also tarnish your reputation, erode customers’ trust, endanger your customers and employees, and jeopardize the future of your entire business.
That's why it is important to understand your cyber risks and liabilities and get the insurance you need to help protect your business from cyber-related risks.
Commercial Auto Insurance
Commercial auto insurance works a lot like your personal auto insurance. If your company owns a vehicle, you are mandated by the state to carry at least the state minimum coverage to drive it on public roadways. There is some complexity surrounding what is and is not covered if you drive your personal vehicle for business use, so be sure to do your research to make sure you are fully covered.
Workers’ Compensation Insurance
Workers' compensation insurance is meant to protect the interests of your employees if they are injured on the job. It can also protect your business from a lawsuit if that employee needs compensation for their injuries. Workers' compensation insurance is mandated in most states if you have any employees.
Small Business Insurance FAQ
Do I need business insurance for my sole proprietorship?
Yes, business insurance is an important part of protecting against various risks and liabilities.
As a sole proprietor, you are responsible for all associated debts, taxes, and legal liabilities. Without business insurance, you are left vulnerable to personal liability should an accident or mistake involving your business occur. Securing your sole proprietorship with the right business insurance policy will shield your business from significant financial strain and other risks.
How much will it cost to insure my sole proprietorship?
When it comes to the cost of insuring your sole proprietorship, the total will vary depending on a number of factors, including the different kinds of risks your business might experience. It’s estimated that small businesses pay anywhere from $14/per month–$124/per month for any one kind of insurance coverage.
What are the main types of sole proprietorship insurance?
Some of the most common business insurance options for sole proprietors include a business owner's policy, general liability insurance, professional liability insurance, and business income insurance. As a sole proprietor, your best coverage will most likely be a combination of policies catered toward your particular business.