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Setting up shop: Legal and Insurance Matters

I thought I had my form of business ownership firmly decided when a co-worker raised an important consideration – teaching children puts me in a higher risk category…how was I going to account for that to make sure I was adequately protected?

The business guides make it sound so easy and inexpensive to set up a home-based craft business.  Going into business is easy – sell something  or provide a service and collect payment.  Keeping it legal and covering your a$$ets is another matter entirely.  Guess it all depends upon the type of business that you have and the amount of due diligence you conduct.

If I were simply going to make quilts and do sewing for hire, I would work as a sole proprietor and convert to an LLC when revenues hit a certain target.  I would get my business license, arrange for general liability coverage and be done with it.

Teaching the small fry adds an entirely different risk to the equation.  (My insurance costs doubled.)

To minimize my exposure and risk, I did the following:   (1) Switch to a single member limited liability company (LLC) instead of sole proprietor.  (2) Carry Professional Liability (E&O) insurance with a specific endorsement.

It took less than 5 minutes and $100.00 to file the necessary LLC paperwork electronically on the   Georgia Secretary of State’s Corporations Division. (That may also save me having to file a DBA when I apply for a business license, but we’ll see about that).  I need this before I can apply for a business license.

Navigating the insurance universe was a little more daunting.  What I’m going to discuss below is for solo artisans and craftspeople with home based businesses.  NOTE: YOUR HOMEOWNER’S POLICY PROBABLY DOESN’T COVER YOUR BUSINESS PURSUITS.  Business owners with brick & mortar storefronts or offices need a complete BOP (business owner’s policy) – not what I’m describing here.

As a home-based business person, you will definitely need:

(1) General Commercial Liability “GCL” ($1 million is the minimum suggested and amount normally required by companies requiring Certificates of Insurance)  and/or Professional Liability, if you teach students.

(2) Business Personal Property “BPP” (how much are your sewing machines and stash worth???)

You may also need:

(3) Inland Marine (funny name but includes off premises or travel and exhibition insurance).

Some GCL policies include professional liability coverage. If you teach kids, then you need to see if your GCL specifically excludes abuse/neglect/misconduct.  It’s unfortunate, but in today’s litigious society, you need coverage for that if you work with children.  Ask the insurer if they will write an endorsement for this. If not, then you might want to consider getting a separate Professional Liability Policy and again, you will have to ask for this endorsement to be added to the policy.  Policies for $1 million in professional liability coverage with that specific endorsement might cost $400 & up annually.*  (I obtained mine through a professional teacher organization that writes specifically for tutors and teachers in private practice.)

Your insurance needs are as individual as your business.  Policies can often be custom tailored to meet your special needs, or it may take a combination of policies to cover your risks.

The first place to start researching your craft insurance needs is with the same agent who writes your home and auto policies.  If they stare at you blankly, then take comfort in knowing that there are organizations out there who write insurance policies specifically for artisans and craftspeople.

Some helpful sites to educate you in the ins and outs of craft business insurance:

Article from the Crafts Report discussing craft business insurance. (linked from RLI website)

Studioprotector.org  (explains why you need separate insurance – resources link will put you in contact with companies who write policies for home based businesses)

Fractured Atlas (great information about insurance considerations for craftspeople – teaching artists who want one policy to include BPP coverage may want to look here and they CAN include the abuse/neglect/misconduct endorsement – found this out AFTER I obtained the other insurance.)

In my situation as a Teaching Artist who also crafts and teaches away from my home studio, two separate policies best met my needs – one Professional Liability with the specific endorsement and a GCL/BPP policy.  I’m covered whether I teach from home, travel to a client or in a sewing shop.  I’m also covered if I exhibit or sell at a craft fair.  As my micro-business develops over the next year, I’ll have a better handle on my exact insurance needs.  I can reshop prices/policies at that time.  Still shaking my head at the reality that insurance costs have already eaten up 10-20% of my anticipated first year revenues.  Yikes!

Worth noting: It makes no difference on insurance policies if your craft business is a sole proprietorship, LLC or corporation.  Whatever you do, make sure you as a person is listed as the first insured, not the LLC or corporation.

Disclaimer:  I am not a legal or insurance professional.  I am merely sharing what I learned on my way to setting up my home-based craft business.  As has been said, you have to go in treating it like a business from the get go.  Always be sure to consult your legal, tax and insurance advisors for the best advice for your particular situation.