Should a Sole Proprietorship Incorporate or Obtain Insurance Coverage?

Our Lynnfield Greater Boston business lawyers are often asked by sole proprietorship businesses whether it should incorporate or purchase an insurance policy. The most accurate answer to that question is that it depends on the facts and circumstances surrounding the business.  The safest possible solution is that a sole proprietor should organize or incorporate as as legal entity AND purchase a commercial liability insurance policy. This will provide the maximum amount of protection against potential claims, with few exceptions. 

In most, if not all cases, small business owners should retain a business lawyer to incorporate or organize the business as a legal entity.  This provides a number of benefits such as the limited liability of the owners or operators of the business (Separation and protection of business and personal assets); a separate tax identification number for tax payments and reporting; an ability to open up business bank accounts and access all of the financial tools available for business; and an ability to sell-transfer interests in the business to investors, partners, and family members. An organized or incorporated business also provides additional credibility and reputation to the business itself.  

One alternative, but seldom recommended option by our business lawyers, is that a sole proprietor only purchase general liability or errors and omissions insurance. This is always recommended in addition to setting up a legal entity. These insurance products become very important especially if you are in a high risk businesses areas, such as manufacturing or distributing products into the stream of commerce, or there is any risk of personal injury or property damage in the course of your business, such as personal training, tree removal, demolition, or operating a store front during the New England winter.  (This recommendation applies despite the language in your contract concerning waiver, release of liability, or assumption of the risk). In some rare insurances, sole proprietors can operate very successfully for a number of years without ever incorporating and simultaneously maintaining strong insurance coverage. 

If you have any questions about your sole proprietorship business, please feel free to contact one of our business - corporate lawyers at the Law Office of Stefan Cencarik, PLLC.