If you run a business by yourself and never registered it as anything else, you’re a sole proprietor, and the SBA says you can be held personally liable for the business’s debts and obligations. There’s no separate company for a creditor or a lawsuit to stop at, so a claim against the business is a claim against you, your bank account and, depending on your state’s rules, much of what you own. That’s why business insurance matters more for a sole proprietor than for almost anyone else.
What you need depends on what you do. Most one-person businesses start with general liability, professional liability or both, add coverage for any tools or equipment they’d struggle to replace, and look at workers’ comp only when a contract or a hire calls for it.
Key takeaways
- A sole proprietorship isn’t a separate legal entity, so the owner can be held personally liable for the business’s debts and lawsuits.
- For a sole proprietor, business insurance is often the main protection between a claim and personal savings, because it can pay to defend and settle covered claims.
- Most sole proprietors start with general liability if they work around people or property, or professional liability if they sell advice, design or expertise.
- Workers’ comp for yourself is often optional when you have no employees, but rules vary by state and general contractors frequently require it anyway.
- Buy the policy in your own legal name, plus any trade name you use, so it matches the contracts and certificates you sign.
What “sole proprietor” means for a claim
You may be one without ever deciding to be. The SBA explains that you’re automatically considered a sole proprietorship if you do business activities and don’t register as any other kind of business, and the IRS defines a sole proprietor as someone who owns an unincorporated business by themselves. A freelance designer, a handyman with a truck, a house painter, a bookkeeper working from the kitchen table and a stylist renting a chair are all, very often, sole proprietors.
The business and the owner are the same person in the eyes of the law. You can still get a trade name, and you’ll report business profit on your own tax return, but a trade name is a label and nothing more, so when a client sues the name on your invoices, they’re suing you. A judgment against the business is a judgment against the owner, and it can be collected from the owner’s money.
Why a policy is the main protection you have
If you read one section, make it this one. An LLC or a corporation puts some distance between the business’s liabilities and the owner’s personal assets, which is why people form them, but a sole proprietorship has none of that distance, so the main thing standing between a claim and your savings is whether you have a policy that answers it, subject to its terms, limits and exclusions.
Think about what a claim costs before anyone decides who was right. A client who says your advice cost them money, or a homeowner who says your work flooded their kitchen, usually starts with a letter from a lawyer, and answering that letter properly costs money whether the claim has merit or not. A liability policy typically pays to defend covered claims, as well as paying covered damages up to its limits, and for a sole proprietor the defense alone can be the difference between a bad month and a drained savings account, because without the policy you’re paying your own lawyer out of the same account you pay your rent from.
So should you just form an LLC? Maybe. The SBA notes that an LLC protects owners from personal liability in most instances, yet an LLC doesn’t pay for anything, and for a one-person business, the person who did the work is also the owner, which means a claim about your own negligence can often still reach you personally, depending on your state’s law. That’s why most LLC owners still carry business insurance. Our view: the structure is a question for your accountant or attorney, but insurance is something most sole proprietors shouldn’t skip, whichever structure they pick.
Which policies a one-person business usually starts with
Start with how you could hurt someone, then what you’d struggle to replace. This is where most sole proprietors begin:
| If you mostly | Usually start with | Often add |
|---|---|---|
| Work in clients’ homes or on job sites | General liability | Tools and equipment |
| Sell advice, design, bookkeeping or other expertise | Professional liability | Cyber, general liability |
| Have clients come to you, in a studio, a chair or your home | General liability | Professional liability, for treatments or services |
| Carry expensive gear from place to place | Tools and equipment | General liability |
| Keep stock or equipment at a shop or studio | General liability, commercial property | Business income |
Two cautions. First, if you work from home, don’t assume your homeowners or renters policy covers the business, since the NAIC says business property and liability are typically excluded from a traditional homeowners policy, and does homeowners insurance cover a home business? shows where the gaps sit. Second, your vehicle is a separate question, and a car or truck used for work may need commercial auto insurance, which Corgi doesn’t sell.
Do you need workers’ comp if it’s just you?
Often not. But it depends on your state, and contracts can change the answer. New York’s Workers’ Compensation Board, for instance, says coverage isn’t required for a sole proprietor who has no employees, and that a sole proprietor may voluntarily cover themselves under a policy. Other states set their own rules, and your state agency, found on the Department of Labor’s list of state workers’ compensation agencies, is the authority on yours.
Contracts get a vote too. The same New York page points out that general contractors routinely require subcontractors to show proof of their own workers’ comp, because insurance carriers may charge the contractor premium for subcontractors who are uninsured, which can leave a sole proprietor who isn’t legally required to carry it buying a policy that includes themselves just to work for a particular contractor. If you’re a one-person trade working under GCs, expect the question, and weigh whether to cover yourself before a contract forces the choice.
Getting set up the right way
A few practical steps keep a sole proprietor’s coverage working the way it should.
- Use your legal name on the policy. The named insured should be you, as the owner, plus any trade name you do business under, so it matches what’s on your contracts and invoices.
- Describe the work accurately. List every kind of work you do, including the occasional jobs, because a claim from work the policy doesn’t describe may fall outside the classification it was written for.
- Match your contracts. Pull the insurance clause from any lease or client agreement and quote against it, including any additional insured wording.
- Keep the money separate. A separate business account won’t create legal separation for a sole proprietor, but it makes claims, audits and taxes far easier to document.
- Have proof ready. Clients and venues ask for a certificate of insurance whether or not you have staff, and with Corgi it’s available the day you buy, to download or send from your account.
You can get a quote online in about five minutes, with underwriters, not a broker, answering your questions. If you hire later, workers’ comp can be added to your existing policy without a new application.
See what general liability costs for your business
About five minutes, all online. Your certificate is ready the day you buy.
Insurance for a one-person business is rarely complicated, and the real risk is putting it off because the business feels too small to need it. Claims don’t scale with the business. A single flooded kitchen or one disputed project can cost more than a year of profit, and as a sole proprietor, all of that profit was already yours.
Frequently asked questions
Do sole proprietors need business insurance?
Usually not by law, unless you have employees, a licensed trade that requires it or a contract that demands it. But because a sole proprietor can be held personally liable for the business’s debts and lawsuits, most should carry at least general liability or professional liability, depending on the work.
Does my personal insurance cover my sole proprietorship?
Usually not much of it. Homeowners and renters policies typically exclude business liability and limit business property, and personal auto policies may not cover business use of a vehicle, so check each policy’s business-use terms before you rely on it.
Can a sole proprietor get workers’ comp for themselves?
In many states, yes. New York, for example, lets a sole proprietor with no employees voluntarily cover themselves, though rules vary by state, and some general contractors require subcontractors to carry a policy that includes the owner.
Should I form an LLC instead of buying insurance?
They do different jobs. An LLC can protect personal assets from the business’s debts in most instances, while insurance can help pay covered claims, and since a claim about your own work can often still reach you personally, most owners need insurance either way.
Sources
- Choose a business structure, U.S. Small Business Administration
- Sole proprietorships, Internal Revenue Service
- Is workers’ compensation coverage required?, New York State Workers’ Compensation Board
- State Workers’ Compensation Officials, U.S. Department of Labor
- Working from home and your insurance coverage, National Association of Insurance Commissioners
