Why is insurance important for a small business?
Small business insurance can protect your company from being liable for accidents, legal claims and damages to your business. Theft, natural disaster, employee injuries, property damage and other circumstances can all have a negative impact on a company’s ability to do business if they are uninsured. Having small business insurance can help ensure that your business has financial protection to continue operating if an accident or disaster happens. Some types of small business insurance are required, and businesses need to have proof of these insurances to operate.
Types of insurance for businesses
Similar to personal insurance policies such as rental, vehicle and health insurance, small business insurance comes in many forms to protect business owners from certain situations. Not all businesses need every kind of small business insurance, so it’s important to understand their functions to create an insurance plan that makes sense for you. Some of the most common forms of insurance for small business include:
All employers are required to pay federal and state unemployment insurance. This is a small percentage of the employee’s pay that you withhold as part of payroll taxes that is added to a pool for future unemployment benefits. Unemployment insurance does not require you to buy an insurance policy, you simply have to deduct the appropriate amount of funds. Check your state’s unemployment insurance rate to make sure you are meeting the legal contribution requirement for unemployment insurance.
Requirements for workers’ compensation insurance vary from state to state. Workers’ compensation covers employee medical bills and some of their wages if they have a work-related injury or illness. Workers’ compensation insurance can protect you from lawsuit costs if an employee sues based on an on-the-job injury. Businesses purchase workers’ compensation plans from an insurance carrier, usually paying a monthly fee.
Disability insurance is required in five states and takes a percentage of an employee’s salary out of each paycheck. Businesses can sign up for short-term and long-term disability insurance as a benefit to their employees even if they live in a state where it isn’t mandatory. This type of insurance provides financial assistance for people who cannot work, even if the injury or illness is not work-related.
Liability insurance provides optional coverage to businesses who want protection from potential legal action. If someone is injured on your business property, general liability insurance can protect you from the cost of being sued. Liability insurance also protects against libel lawsuits and property damage that happened in the course of business, such as a landscaping business that caused damage to a homeowner’s property. General liability insurance may cost between $400 and $600 a year based on the level of coverage you need and can cost much more in high-risk industries. There are several other forms of liability insurance including:
- Professional liability
- Employment practices liability
- Product liability
Commercial property insurance protects your company’s inventory, equipment and physical location from damage and theft. It can cover water and electrical damage from burst pipes or faulty wiring, vandalism, fire damage and shoplifting. This type of business insurance is not legally required, but it is a necessary business expense for many small companies, especially if they have a storefront. It may cost a couple of thousand dollars per year for a base package.
Commercial auto insurance
If you have company vehicles to transport employees, inventory or equipment, commercial auto insurance can provide coverage in the event of a collision. Commercial auto insurance may be able to cover personal employee vehicles if they drive their own cars while carrying out job responsibilities.
How to buy insurance for a small business
Use these steps to guide you when purchasing insurance for your business:
- Do your research.When deciding what insurance policies to sign up for, look into federal, state and local laws regarding business insurance. Find out what you need to have covered. Then, consider getting additional insurance to protect your business. Research what types of insurance are standard in your field to protect from industry-specific risks.
- Quote prices.Make a list of insurance providers and ask for price quotes for various policies. Determine what your business can afford and what coverage options are most important to you. Consider the cost of the deductible and the monthly or yearly premium to assess short-term and long-term coverage costs. You can hire an insurance broker to gather all of the information for you.
- Update your policies. Regularly review your insurance policies to make sure they have the right amount of coverage for the size of your business. Larger inventory orders, more employees and new properties can all require a more extensive insurance policy. Most business policies expire after a year, but many companies allow for upgrades at any time.
Frequently asked questions about insurance for small business
What is a Business Owner Policy?
A Business Owner Policy (BOP) is an insurance policy that small business owners can customize to get the coverage they need for their company. Insurance providers usually have base BOP plans available for different sized businesses in different industries.
Why do businesses need insurance?
Businesses need insurance to protect themselves, their customers and their business partners. Without adequate coverage, a small business would be paying expenses—repairs, medical bills or legal fees—out of pocket. In some cases, a small business may be required to carry insurance to get financing for buildings and equipment.
Is business insurance tax deductible?
According to the IRS, you can generally deduct insurance premiums as a business expense when filing your taxes as long as they are “ordinary and necessary.” If you’re unsure whether you can deduct your business insurance policy, ask a tax professional for advice.