Sole proprietorship insurance

In this short guide, we’ll share the reasons why sole proprietorship insurance is a smart initiative for one- and two-person business ventures.

business owner who is a sole proprietorship

As the owner of a sole proprietorship, you run a one-person business where you’re CEO, chief of strategy, and lead accountant all-in-one. Another responsibility? Making sure your small business is protected from lawsuits and liability risks.

Sole proprietorships don’t need to register as formal business entities or register for EINs. In fact, some sole proprietors may not identify as small business owners! Nonetheless, these business entities are still subject to the same risks as other small businesses.

So do you need small business insurance coverage to protect you from claims of wrongdoing? In this short guide, we’ll go over the reasons why sole proprietorship insurance is a smart initiative for one- and two-person business ventures.

What is a sole proprietorship?

A sole proprietorship is the default business structure for one-person businesses. If you don’t choose to register your one-person business as a formal entity (i.e. an LLC), you’re a sole proprietor by default.1

The most common form of business ownership, sole proprietorships are prevalent in the following professions:2

  • Freelancers
  • Artists
  • Housekeepers
  • Tutors
  • Landscapers
  • Virtual assistants

There’s a clear reason why sole proprietorship is the preferred business choice for so many independent workers: there are fewer fees and fillings associated with operating this business type.

  • A Limited Liability Corporation (LLC) needs to register with the state, pay a fee, and in some cases, publish notice of its formation in several local newspapers. Then, most LLCs will pay quarterly estimated taxes. Finally, they may need to file a yearly profit report with their state.
  • If you don’t take any steps to register your business, then you are by default a sole proprietorship. As a sole proprietor, you’ll still need to file and pay your taxes and follow the laws in your state.

In some cases, sole proprietors will need an EIN because they’ve hired an employee, are trying to open a business bank account, or are filing an excise or pension plan in their tax returns. Although that creates more paperwork, it’s still often less work-intensive than opening an LLC.

However, for the most part, sole proprietorships are hassle-free—unless, that is, a lawsuit arises.

Sole proprietorships and liability

If LLCs are so much more work, why doesn’t every single-member business choose to operate a sole proprietorship?

While LLCs offer limited liability protection (just as their name suggests), sole proprietorships provide business owners with few legal protections.

Imagine a scenario like the following:

You’re a freelance writer operating as a sole proprietor. You write an article for a client’s blog, drawing on web resources. In the process of copying and pasting text, you forget to properly source and cite a few quotes. Should the original website sue your client for plagiarism, you could be named in the lawsuit and expected to pay up.

Could you find yourself responsible for these costs?

Unless you have small business insurance, the answer is yes.

As you can see, sole proprietorships can face significant liability risk.

Some sole proprietors may wonder if registering for an LLC would protect their business from being sued and incurring expensive legal costs. However, as the name implies, LLCs provide only limited protection for small business owners. Learn more about the differences between LLCs and sole proprietorships to help you decide.

No matter your business type, without business insurance, you’ll be responsible for your own legal fees, as well as any payouts for damages.

Depending on the specifics of your business, you may be interested in the following kinds of insurance.

General liability insurance

General liability insurance is a must-have for most small business owners. It can protect your business in the event of claims including:

  • Bodily injury
  • Property Damage
  • Personal and advertising injury (trademark or copyright violation, libel, etc.)

If a client or third party makes a claim against you, this kind of insurance can investigate your responsibility with respect to the claim, provide a defense for you, and pay amounts for which you might be responsible.

  • Remember that scenario where you’re accused of plagiarism? Even if you’re eventually cleared of wrongdoing, you’d be responsible for your own legal fees—unless you have a policy that will provide you a defense.
  • Should a client trip on an ill-placed stepping stone while visiting your place of business, they could sue you. Your general liability insurance policy could cover the cost of the client’s trip to the ER.

It’s important to note that this type of policy only covers claims by third parties other than employees injured on the job. For employees who suffer work-related illnesses or injuries, you may need workers’ compensation insurance.

Professional liability insurance

Professional liability insurance is also called errors and omissions insurance (E&O). As this name suggests, professional liability insurance can help to cover claims of errors and omissions that lead to clients’ financial losses.

Potential claims include the following that result from your failing to provide the appropriate services:

  • Advice that resulted in financial loss
  • Mistakes
  • Negligence
  • Failure to complete services as agreed upon

Say you’re an event planner with a full summer calendar. Amidst the rush, should you fail to secure your clients’ caterer on time, then they might have to secure a new, expensive vendor at the last minute.

Should they sue you for negligence, you could be responsible for the difference in the cost of the catering services. In this case, a professional liability policy could help cover those additional costs.

While this type of policy can cover a range of professional errors, it does not cover intentional wrongdoing or criminal conduct.

Business owners policy (BOP)

If you’re looking for ways to protect your business property and guard against the potential of business interruption due to severe weather, government shutdown, and other emergency situations, you may be interested in a business owner’s policy (BOP).

BOP insurance bundles several popular policies, almost always including:

The specifics vary among policies offered by different insurers. Be sure to understand your policy as well as its limitations and exclusions so that you know your business is well-prepared for the risks inherent to your profession.

Small business insurance with Thimble

Thimble believes that small business owners in every profession—from clowning to homemaking to contracting and beyond—need reliable, easy-to-understand policies to protect themselves from risk.

That’s why we’ve created general liability insurance and professional liability insurance policies specific to small business owners’ needs.

With Thimble, getting general or professional liability coverages takes less than a minute. Just click “Get a Quote,” enter your ZIP code, a few details about your business, and your desired insurance coverage length. From there, we’ll generate an instant quote. You can take out a policy by the hour, day, or month. It’s insurance upgraded for the 21st century.

As a sole proprietor, protecting your business and personal finances is key to your long-term success. Life can throw you curveballs—we’re here to catch them.

Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.

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