Expert Advice
A Risk Management Guide for Marketing and Management Consultants

Chapter 2: Understanding Small Business Insurance for Independent Consultants
Part 1: What Is Small Business Insurance?
What Does It Mean to Be a Sole Proprietor or Independent Contactor?

The IRS defines a sole proprietor New browser window icon. as someone who owns an unincorporated business on their own. The benefit of running a sole proprietorship? You don't need much capital to get your business up and running. The arrangement entitles you to all profits your business generates.

However, sole proprietorships also have "unlimited liability" for business debts, which means you're on the hook for whatever losses your business suffers. As we mentioned earlier, if you don't have the commercial funds or business insurance to satisfy a claim, creditors can seize your personal assets.

Like sole proprietors, independent contractors are personally liable for any business debts they incur. According to the IRS, an independent contractor New browser window icon. is a person who has the right to control the manner and production of their work.

This could mean that you:

  • Set your own schedule.
  • Use your own equipment.
  • Decide how and where work is done.
  • Have the ability to subcontract work.

Your client has no authority to control how your work is done, only the result of the work you submit. By this definition, freelancers are also considered independent contractors.

Independent contractors control how, when, and where their work is completed.

While being a sole proprietor or independent contractor comes with some additional requirements (such as paying quarterly taxes), there are perks, too.

For starters, you have fewer insurance obligations than business owners with employees. Once you have employees, most states mandate that you carry Workers' Compensation Insurance, a coverage that provides benefits for employees who suffer workplace injuries or illnesses.

However, if you hire an assistant or subcontract part of your work, you may be required to purchase Workers' Comp coverage. In some cases, you may be able to cover yourself with your plan, which would allow you to receive benefits in the event of a work injury or illness.

For more information on your state's requirements, check out our guide "Workers' Compensation Laws by State New browser window icon.." In the meantime, you can learn more about the insurance policies self-employed consultants do need in the next section.

Next: Part 2: Basic Insurance Policies for Sole Proprietors & Independent Contractors

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