A sole proprietorship is a business entity owned by and managed by an individual person. The business is not a “separate” legal entity as it has no existence outside of the owner. A sole proprietorship is the simplest form of a business entity. Business insurance is fundamental for a sole proprietorship.
Here is a guide on you can get the best business insurance for your sole proprietorship.
What is a Sole Proprietor?
A sole proprietor, or sole trader, is an individual who owns and operates a business entity alone. Sole proprietors can operate their business under their real name or under a fictitious name.
Independent Contractor vs Sole Proprietor
There are many similarities between an independent contractor and a sole proprietor, many people use the two terms interchangeably. However, there is one fundamental difference between the two, which is how they generate their income.
An independent contract generates income by doing contracted or commissioned work at a set fee for various clients. Whereas, a sole proprietor can generate revenue through commissioned client work, but also by selling products to customers.
General Liability of a Sole Proprietor
A sole proprietorship is also known as an unlimited liability company. The liabilities of the owner cannot be separated from those of the business. This implies that the owner will be responsible for any debts, damages, or claims by third parties or creditors. As a sole proprietor, you must have liability insurance that will cover you and your business, should the need arise.
What is Sole Proprietor Liability Insurance?
Sole proprietor liability insurance or personal liability insurance is cover against accidental death, injury, or loss of property of a third-party. As a business owner, you must get personal liability coverage to ensure that you do not incur any out-of-pocket costs related to a third-party.
Insurance Options for a Sole Proprietorship
There are a few insurance options that you can explore as a sole proprietor. The following are the most crucial:
- Life insurance
- Home and household goods insurance
- Credit life insurance
- Dread disease and disability insurance
- Car insurance
Life Insurance for Sole Proprietors
Life insurance is a vital financial product that all working individuals must have. It is more crucial for you – as the owner of a sole proprietorship – to have. This is because as a sole proprietor you can only have access to credit or loans under your legal name.
Should anything happen to you, your creditors will attach your business expenses and debts to your estate. This can be detrimental to your family finances as those you leave behind may be held liable.
Home and Household Goods Insurance
Sole proprietors or self-employed individuals often work from their residential homes. If this is the case for you, you may need to take out home and household goods insurance cover to protect the structure of your home and the contents within. This cover protects you against unforeseen events or damages caused by fire, water, and theft.
Home insurance covers you against the structural damage to your house, while household goods insurance provides coverage for damage or theft of items within your home such as electronics and furniture. You may choose to have only one of the options, but we recommended that you have both.
Credit Life Insurance
Credit is a key financial metric that business owners use to grow their operations. A good credit record is imperative for access to loans and credit purchases. Therefore you are implored to keep a healthy credit score to enjoy benefits such as low-interest rates.
Credit life insurance provides coverage against outstanding debts, loans, or credit purchases in the event of your death, disability, or terminal illness. Some policies include cover against retrenchment, however, this will not apply to you as a self-employed individual.
Dread Disease and Disability Insurance
Similar to death, dread disease and disability are unpredictable events. Hence you must have this type of insurance to offset yourself and your family members from financial strain. Dread disease cover, sometimes called critical illness cover, will pay out a tax-free lump sum if you are diagnosed with an illness that leaves you unable to work or generate income.
The money can be used to cover your living expenses, medical bills as well as other family and household expenses such as the mortgage bond, school fees, water and electricity bills. Dread disease and disability cover provide similar coverage to credit life insurance, but the main difference is that credit life insurance only covers only pays for your debts and credit purchases.
Car Insurance
A car can be a great investment for you as a sole proprietor. You can use it to either conduct business operations or drive to meetings with clients, business meetings, networking events, and so on. Therefore it is crucial to have car insurance for your sole proprietorship.
Car insurance policies vary depending on your needs. You can get a policy that will cover you against damage and theft on your personal vehicle, or a cover against damage or injury to a third party.
Insurance Costs Incurred in a Sole Proprietorship
The insurance costs you will incur as a sole proprietor vary depending on the financial institution you go to. Most financial institutions offer a monthly premium on their policies. The premium amount depends on the items stipulated by you in your policy.
Tax Implications of a Sole Proprietorship
As a sole proprietor, you will be required to pay tax to the South African Revenue Services (SARS) as an individual taxpayer. Your tax will be determined by a sliding scale, meaning that the amount of tax you pay will depend on the amount of money you make, this is called the progressive rate of tax.
The progressive rate of tax implies that the more income you earn, the more tax you will be subject to pay. The current tax rate in South Africa is 18% of taxable income. You need not register your sole proprietorship for tax purposes. But you must notify SARS of the additional revenue you will experience as a result of doing business as a sole trader, freelancer, or independent contractor.
Importance of Sole Proprietor Insurance
Insurance is a crucial financial product that one must have. It is more critical for you as the owner of a sole proprietor as you are more at risk of financial loss. You are fully liable for all financial obligations of the business.
Getting business insurance as a sole proprietor may be intimidating at first, but once you familiarize yourself with the content above, you will realize that it is as easy as getting standard lifestyle insurance.
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