INSURANCE AND PERSONAL LIABILITY

A sole proprietorship has no legal existence separate from its owner. Every debt, contract and lawsuit of the business is the owner's personally, and can be satisfied from the owner's house, savings and other assets. Insurance is the main way a proprietor manages that exposure. This page explains what unlimited liability means in practice, the types of insurance a proprietor should consider, how home-based and vehicle coverage work, the tax treatment of premiums, and other ways to limit personal risk.

WHAT UNLIMITED LIABILITY MEANS

• Business debts: suppliers, landlords, lenders and the CRA can pursue the owner personally for unpaid business debts.

• Lawsuits: a customer injured on the premises, a client who suffers a loss from faulty advice, or a person harmed by a product can sue the owner directly.

• Employees' actions: the owner is generally responsible for the acts of employees carried out in the course of their work.

• No separation of assets: unlike a corporation, there is no business entity to absorb the loss; a judgment can be enforced against personal assets.

CORE BUSINESS INSURANCE

• Commercial general liability (CGL): covers claims by third parties for bodily injury or property damage arising from the business's premises or operations. Landlords and many clients require it, often at $2 million or more.

• Professional liability (errors and omissions): covers claims that advice or professional services caused a financial loss. Essential for consultants, designers, bookkeepers and other service providers, and mandatory for many regulated professions.

• Product liability: covers injury or damage caused by products the business makes, imports or sells. Often included in or added to a CGL policy.

• Commercial property: covers equipment, inventory and leasehold improvements against fire, theft and other perils.

• Business interruption: replaces lost income and pays continuing expenses if an insured event forces the business to close temporarily.

• Cyber liability: covers the costs of a data breach, including notification, recovery and claims, which matters for any business holding client information.

HOME-BASED BUSINESSES

• Home policies exclude business use: a standard home insurance policy usually excludes business equipment, inventory and business liability, and may be voided if a significant business use is not disclosed.

• Home business endorsement: many insurers add limited business coverage to the home policy for low-risk businesses.

• Separate policy: businesses with clients visiting, significant inventory or higher risks usually need a standalone business policy.

• Disclose the business: tell the home insurer about the business in writing, even if no extra coverage is bought.

VEHICLES

• Business use must be declared: personal auto policies are priced for commuting and pleasure; regular business use, such as visiting clients or making deliveries, must be declared to the insurer.

• Commercial auto: vehicles used mainly for the business, carrying goods or tools, or driven by employees usually need commercial coverage.

• Non-owned auto: covers the business if an employee uses their own vehicle on business and is involved in an accident.

PROTECTING THE OWNER

• Disability insurance: self-employed people have no employer plan and, unless they have opted in, no EI sickness benefits. Individual disability insurance replaces income if illness or injury prevents work.

• Critical illness and life insurance: provide a lump sum on diagnosis or death, for example to repay business debts or support a family.

• Workers' compensation for the owner: sole proprietors are usually not automatically covered by their provincial workers' compensation board but can often buy optional coverage. In some industries, such as construction in certain provinces, coverage can be compulsory.

TAX TREATMENT OF PREMIUMS

• Business insurance: premiums for liability, property, business interruption, cyber and the business share of vehicle and home insurance are deductible, on line 8690 of Form T2125 or with vehicle and home costs.

• Personal disability insurance: premiums paid by the proprietor are generally not deductible, and benefits received are generally tax-free.

• Life insurance: premiums are generally not deductible, except for the portion of a policy required by a lender as collateral for a business loan, in limited circumstances.

• Prepaid premiums: the part of an annual premium that covers the next fiscal year is a prepaid expense, deducted in that year.

OTHER WAYS TO LIMIT RISK

• Written contracts: clear scope, payment terms and limitation-of-liability clauses reduce disputes and cap potential claims.

• Good practices: safe premises, documented advice, quality control and secure data reduce the chance of a claim in the first place.

• Incorporation: a corporation limits the owner's liability for business debts, but not for the owner's own negligence or for debts the owner personally guarantees. The trade-offs are covered on the Incorporating the Business page.

• Review coverage yearly: update policy limits as revenue, assets, employees and services change.

KEY POINTS

• The owner is the business: every business liability is personal.

• Start with CGL and professional liability: then add property, interruption and cyber as needed.

• Tell your home and auto insurers: undisclosed business use can void personal policies.

• Protect your income: self-employed people should consider disability insurance.

SOURCES

• Insurance Bureau of Canada: Business insurance and home-based business insurance.

• Canada Revenue Agency: Guide T4002, Line 8690, Insurance.

• Provincial workers' compensation boards: optional coverage for independent operators and sole proprietors.