Insureon Blog

Sole proprietorship vs. LLC: What you need to know

18. March 2019 16:39

Woman deciding between two options

By Melissa Gold, Insureon Contributor

How you classify your business is a decision that could affect your exposure to risk and how you pay taxes. The differences can be subtle, but it’s important to know the benefits of sole proprietorship versus a limited liability company before you start your business.

What’s the difference between a sole proprietor and an LLC?

A sole proprietor is defined by the IRS as a person who owns an unincorporated business. Any person who does business but isn’t registered as a corporation, partnership, or limited liability company is a sole proprietor by default.

A sole proprietor is personally liable for any debt accrued by the business, including lawsuits and other business obligations. If a sole proprietor owes money from a lawsuit judgment or any other debt and the business assets are not enough to cover it, creditors could go after personal assets.

A person who owns a business alone can also file for LLC status. If an LLC owes money that it can’t pay, the owner’s personal assets are protected and creditors won’t be able to reach them.

Other key differences between a sole proprietorship and an LLC:

Hiring employees as a sole proprietor or LLC

Whether you’re a sole proprietor or LLC,  your workers’ compensation requirements will likely be the same if you hire an employee. Most states require any business with employees to carry workers’ compensation, and some states have specific requirements for whether coverage is required for the sole owner.

If you hire employees, it’s especially beneficial to file as an LLC for liability purposes. Workers’ compensation insurance would cover an employee’s workplace injury if one occurs. It wouldn’t provide protection for any other kind of liability from an employee’s negligence or accidental damage of property.

General liability insurance for your small business

Whether you’re a sole proprietor or the owner of an LLC, general liability insurance is crucial. General liability insurance covers company assets and is often required to sign contracts. If you are a sole proprietor, liability policies can also help shield your personal assets if you are held liable for an injury or property damage.

General liability insurance can cover the legal fees associated with a lawsuit and provide general protection for property damage and injury of non-employees, product liability, and even advertising injury protection in the event of a lawsuit for slander, libel, or accidental copyright infringement.

Learn more about small business insurance protection and compare quotes online for free with Insureon to find the small business insurance that best suits your needs.


General Liability Insurance | Small Business

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