Liability & Insurance Laws on Sole Proprietorships in Texas

By Heather Frances J.D.

If you operate a business in Texas without creating a partnership, corporation or other type of formal business structure, you operate a sole proprietorship. While there are advantages to sole proprietorships, such as the simplicity of opening and operating them, there are also increased liability risks for which you may wish to buy insurance coverage.

Sole Proprietorship Liability

Unlike many other Texas business structures, sole proprietorships provide no liability protection for their owners. Legally, there is no distinction between the business's liabilities and the owner's, which means a sole proprietor’s personal assets may be taken to pay business debts. For example, if an employee of your sole proprietorship damages someone’s property while on the job, you will be forced to pay those damages out of your personal funds if there is not enough money in your business to satisfy the debt.

General Liability Insurance

Though it isn’t required in Texas, general liability insurance for your sole proprietorship allows you to protect your personal and business assets from many types of claims. Depending on your policy, general liability insurance could protect you from claims such as personal injury, property damage or false advertising. For example, if food served by your catering business causes food poisoning at an event, sick attendees may demand compensation from your business. If your liability insurance covers this type of claim, you won’t have to pay the claims out of your business or personal funds.

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Workers' Compensation Insurance

If your sole proprietorship has employees, Texas law requires you to either carry workers’ compensation insurance or opt out worker’s compensation completely. Workers’ compensation insurance is designed to compensate injured employees and protect employers from liability for claims from an injured employee. If you choose not to carry this type of insurance, you must file an annual notice with the Texas Department of Insurance, display a notice of noncoverage in the workplace and provide a written noncoverage statement to every new employee. If you choose to carry workers' compensation insurance, you must buy your policy from a company licensed by the Texas Department of Insurance, or you may pursue self-insurance certification.

Other Insurance Requirements

Even though liability insurance is not required for all sole proprietorships, Texas does require certain types of businesses to carry liability insurance regardless of how they are structured. For example, electrical sign contractors must carry certain levels of liability insurance to obtain their license to operate in Texas. These rules apply to all business structures, including sole proprietorships. Additionally, you must buy at least the minimum vehicle liability coverage required by Texas law for your business vehicles.

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