Business Insurance: Business insurance for sole traders and partnerships

Why would sole traders and partnerships need business insurance? Getting to grips with all the legalities of running a small operation can be a real nightmare. And nowhere is this more confusing than with business insurance needs. The costs of getting this wrong could be disastrous for your business and even put an end to trading. The stakes are high, so it’s essential to get it right first time.

Do sole traders need business insurance?

You are classed as a sole trader if your business is owned and run by one person, which is the same thing as being self-employed. Being a sole trader means you are responsible for the business and keep all of the post-tax profits, although it doesn’t necessarily mean that you work alone. It does, however, mean you are responsible for taking out the correct level of business insurance for sole traders, which usually includes the following four types of professional insurance:

• Employers’ liability insurance is a legal requirement if your business has employees and covers you against any claims they may make in relation to accidents or illness. The minimum requirement set by the HSE is £5m, although most small businesses choose cover closer to £10m.

• Business liability insurance for the public and your products is invaluable if you have regular dealings with the public, protecting you if someone should be injured or their property damaged as a result of your business or its products.

• Professional indemnity insurance covers the cost of defending yourself against professional negligence allegations (such as giving incorrect advice) and any compensation that needs to be paid as a result. This is very important for a sole trader and can usually be taken out for up to £5m.

• As a sole trader you will also need to insure your building (and if you work from home this needs to be reflected in your insurance) and you should consider contents insurance and cover for expensive electronic items, such as your laptop, when you travel.

Business insurance for partnerships

A partnership is defined as a business owned and run by two or more people, usually up to a maximum of 20. This can be a profitable way of working as all partners make contributions and share the financial risks, and tax isn’t paid on income but rather it is passed on to the partners. As with all businesses, the usual building, indemnity, motor and public liability insurance should be taken out if applicable.

However, if you are in a partnership, you will probably want to take out business partnership protection as well. This is because being in a partnership carries specific risks, namely what happens to business shares if a partner dies or wants to leave the business? Business insurance for partnerships provides a safety net, ensuring the remaining partners can pay compensation, buy out the business or make arrangements for partners who are ill or injured and can’t work.

National Insurance contributions

Whether you are classified as a sole trader or a partner in a partnership, you are also liable for making National Insurance contributions. The amount you need to pay is linked to the profit your business makes and is calculated by the HMRC. Depending on earnings, this may be paid through the annual self-assessment calculations or as a separate direct debit (but if profits are expected to be less than £5,725 in a year, you may not have to pay).