Business insurance questions

[Matt Day]

I'm starting a small part time furniture making business and have a couple questions about what type I need. Let me first stress the word small. I am a full-time stay-at-home dad with two young kids, and I would be doing this in some of my spare time while they are at preschool. My shop is in my basement and I will be the sole proprietor. I am not going to be batching out furniture, I will most likely not sell more than $10k a year and we don't need this income - it's essentially an extension of my hobby that I'd enjoy. I do however want to do this the right way; I have an LLC and EIN, am making a website, and will also make business cards.

I plan to make custom furniture such as dining tables, benches, coffee tables, desks, bedroom sets, etc. No chairs most likely.

My main question is about liability insurance and whether or not I need it given my circumstances. I will not be installing anything in anyone's home, clients will not come to my home, and I don't see much risk where I would need liability. But I am no expert and wanted to see what others are doing. Maybe I answered my own question when I said I want to do this the right way, but I also don't want to spend money unnecessarily.

I know I need coverage for equipment and I am inventorying everything this week to come up with a replacement cost.

If any other small business owners in a similar situation could chime in with how they have their business structured, I would greatly appreciate it.

[Jim Becker]

You probably should speak with an independent business insurance specialist to see what makes sense for you. Even though you will not have "visitors" or be "visiting", there's always the potential for liability concerns with the product, itself...that may or may not be a factor here.

But more importantly, you need to speak with your normal insurance agent about the implications of operating your business from your house and using your heretofore woodworking hobby shop to produce product for a small business. Some insurance carriers don't mind incidental business activities like this; some with start throwing things at you or even cancel your policy.

[Evan Stewart]

I am by no means an insurance agent nor a business advisor. That being said I do have personal experience with insurance in several businesses of varying size. I currently have an LLC that I carry a state contractor license and a $5 million liability, workers comp and a $100K bond. This is the business that I use to do construction and renovation and has 3 employees. For my custom work I use a separate business that is a sole proprietorship I do carry a $1 million liability for that along with tool coverage. A million dollars is way more than I would ever need but liability insurance generally starts for my needs around this level. The policy for my sole proprietorship only costs around $650/year and it covers all my equipment.

I would imagine that you could probably add your equipment to your homeowners policy and if you are only building furniture and not doing any work at all in customers houses including delivery you would probably be ok.
2 things that come to mind:

1. Some homeowners policies may not be willing or able to insure your equipment if it is tied to a home based business that is not independently insured. Your agent would have the answer.

2. Having liability insurance can give customers more peace of mind and there are some advertising entities that require it. Besides the skill necessary to complete the project, customers also want to feel that they are not risking financial liability as well.

That's just my opinion.

[Matt Day]

Thanks for the comments guys.

Jim - I've talked to 3 insurance agents so far. My current insurer, and two independent. Two have included the following liability:

Coverage Provided : Limit of Insurance
Each Occurrence Limit $1,000,000 Per Occurrence
General Aggregate Limit (Other Than Products-Completed Operations) $2,000,000
Products-Completed Operations Aggregate Limit $2,000,000
Personal And Advertising Injury Limit $1,000,000 Any One Person or Organization
Damages To Premises Rented To You Limit $1,000,000 (Any One Fire or Explosion)
Medical Expense Limit $15,000 Any One Person

The third asked me if I needed liability given what I plan to do - I wasn't sure so I flipped it around and asked her to ask the expert in her office.

My current insurance provider is okay with a home business, but they quoted me $1300/yr (with equipment coverage at $40k which was a guess). That would eat a lot of profit for my small operation. I've asked the other agents to include home/auto/business into one quote.

Evan - The way I understand it, if the equipment/tools are used by the business it would not be covered by homeowner's insurance. I would need a separate rider for it or business policy.

[Lee Schierer]

I don't know where you live, but you need to make sure your local zoning allows small home based businesses. Some zoning does and some does not. Running afoul of the zoning could prove costly.

[Evan Stewart]

Matt, the policy you quoted above is essentially the same coverage that I have for the custom carpentry sole proprietorship part of my business. My policy runs me approx $650 Main Street Insurance is the underwriter but it was purchased through a local broker. I did add additional coverage to our homeowners policy for fire and water damage beyond our normal policy.

The problem you are looking at right now with the costs and logistics of a new business in this field can definitely be frustrating for Sure! One of the reasons I significantly downsized the general contracting side of the business was the overhead. I live in the Washington D.C. area and in order to work in DC, maryland and Virginia we are required to have redundant liability and workers comp in all 3 places approx 60% of net income.

As Lee mentioned you should definitely check with state and municipal for the business restrictions and other requirements. A friend of mine that is doing something similar to you found the best way for him to get his product out without having to spend a huge amount of money was to sell his pieces through an artisan guild. By setting it up this way he was able to avoid some of the business requirements where we live as it was considered "manufacturing crafts". Your next stop should probably be your town hall. They will be able to let you know what requirements and restrictions you may havr on your property. I wouldn't decide on insurance until after checking with the town since they may have an insurance or bonding requirement.

[Don Jarvie]

Maybe this is going against the grain but before you sink a ton of money into this sell a few things and go from there. You can make sure your homeowners policy will cover your tools and get a few orders. If the orders start coming in you can consider starting a business. Keep in mind Uncle Sam and the State will have their hands out too.

To make any money you really need to crank out the pieces unless your just looking to support the tool fund. Also if the client isn't in a rush great. If they are you may want to pass on you. Start with family and friends and see what happens.

[Matt Day]

Lee - I have confirmed that this is allowed and no permit or anything is needed. Basically just no large truck deliveries or signs in my front yard.

[Nicholas Lawrence]

Keep in mind there is tremendous variation from state to state, insurer to insurer, and policy to policy. You really need to be sure you are getting good advice from a licensed broker in your state.

[Mark Bolton]

I am by no means an insurance agent nor a business advisor. That being said I do have personal experience with insurance in several businesses of varying size. I currently have an LLC that I carry a state contractor license and a $5 million liability, workers comp and a $100K bond. This is the business that I use to do construction and renovation and has 3 employees. For my custom work I use a separate business that is a sole proprietorship I do carry a $1 million liability for that along with tool coverage. A million dollars is way more than I would ever need but liability insurance generally starts for my needs around this level. The policy for my sole proprietorship only costs around $650/year and it covers all my equipment.

I would imagine that you could probably add your equipment to your homeowners policy and if you are only building furniture and not doing any work at all in customers houses including delivery you would probably be ok.
2 things that come to mind:

1. Some homeowners policies may not be willing or able to insure your equipment if it is tied to a home based business that is not independently insured. Your agent would have the answer.

2. Having liability insurance can give customers more peace of mind and there are some advertising entities that require it. Besides the skill necessary to complete the project, customers also want to feel that they are not risking financial liability as well.

That's just my opinion.


Not meaning any offense at all but these numbers, in my experience, are extremely optimistic. I dont hear of many people at all getting a million dollars for less than $1k/year (more like 1200-1400) and thats just straight liability. We for instance, with 200k for the builing, 350k for contents, and a million in liability, would likely pay somewhere in the 4K plus range.

For just liability, if your not dealing with the end user (selling wholesale), have 2-5 employees, do NO install work whatsoever, it would be somewhere in the 1200-1500 range. Might chop that by a third if you set it up with no employees.

I have personally never heard of anyone in my area having a policy for sub $1K.

If you open your policy up to installs, delivery of any kind to the end user, if you have ANY hand in the design or implementation of the project, and so on, your numbers go up substantially.

We deal primarily with architects and designers and do ZERO install work. That gets us down in the low $1k range, with employees and payroll. If we opt in for ANY of the above, the number goes up.

P.S. If you do ANYTHING pertaining to kids in ANY WAY, toys, beds, toy boxes,.. Virtually every underwriter/insurer out there, will just say, you are ineligible with us. There is no small shop that could ever attempt to afford the coverage required to include the word "kid" or "kids" in their policy. There are probably 3-4 companies in the country that will write that policy.

[Jim Becker]

Mark, insurance is regulated state by state, so that's going to have an effect on rates as well as what carriers offer coverage. It doesn't sound like the OP will have any employees, so a lower rate for liability on a part-time business doesn't sound unreasonable to me. But I haven't looked into it for here in PA as my commission work has been minimal. That might change if I decide to partially retire in a year or three...

[Mark Bolton]

Mark, insurance is regulated state by state, so that's going to have an effect on rates as well as what carriers offer coverage. It doesn't sound like the OP will have any employees, so a lower rate for liability on a part-time business doesn't sound unreasonable to me. But I haven't looked into it for here in PA as my commission work has been minimal. That might change if I decide to partially retire in a year or three...

Jim, I agree, but there is a low end threshold. And I may well be wrong, and it may be due to some blanket coverage, but I dont think $700/year is anywhere near the low end threshold. There is just a cost for getting in the game. Im sure as you say in certain very rurual states there may be exceptions to the rule but in talking to a lot of fellow shop owners the variation is on the order of tens of dollars not hundreds.

[Nicholas Lawrence]

Moving from Maryland to Virginia my auto rates dropped by something like 1/3 (same insurer, same coverage, same vehicles, same annual mileage, same drivers).

The regulatory and legal environment can make an enormous difference.

[jack duren]

I don't see why you would need to worry about any of this. Nothing requires you to install anything...

[Matt Day]

Jack, surely equipment coverage at least right?

That's where I'm struggling - where is the liability? The only thing I could think of that has really any chance of happening is a heavy person sits in a chair I made and it crumbles and a leg goes where the sun don't shine and I get a lawsuit filed against me. Sorry, I digressed there, but you know what I mean. What liability issues do I really have with tables, desks, bedroom furniture, etc?

I've gotten a lot of responses but I don't know how many have their own furniture business. I'd really like to hear from folks that are in business, not just speculating.

[Jim Becker]

Do not underestimate current society's propensity to sue first when something goes wrong with a product...that's why the liability coverage is still important, despite your operational piece being isolated from any clients. Stuff happens...

It's truly sad that things are this way these days, but it's reality.

[Earl McLain]

Do not underestimate current society's propensity to sue first when something goes wrong with a product...that's why the liability coverage is still important, despite your operational piece being isolated from any clients. Stuff happens...

It's truly sad that things are this way these days, but it's reality.

I think Jim speaks wisely. One overlooked benefit of liability insurance (personal or commercial) is the defense of suit. That could be a huge expense in and of itself--and not part of the claim.
earl

[Mark Bolton]

Jack, surely equipment coverage at least right?

That's where I'm struggling - where is the liability? The only thing I could think of that has really any chance of happening is a heavy person sits in a chair I made and it crumbles and a leg goes where the sun don't shine and I get a lawsuit filed against me. Sorry, I digressed there, but you know what I mean. What liability issues do I really have with tables, desks, bedroom furniture, etc?

I've gotten a lot of responses but I don't know how many have their own furniture business. I'd really like to hear from folks that are in business, not just speculating.

We have a custom shop and feed mostly large commercial contractors and architects/interior designers. We do no installs, and little to no field work. All installs are sub'd out to contractors carrying their own coverage. As Jim states, the reasons someone can sue are endless and often times completely ludicrous but if lawyers think they can get some damages, they will. I mean look at the Ikea case with the drawer units tipping over on children. That could, and would, and did, happen throughout history. A kid pulls out the bottom drawer, climbs on it like a ladder, and the unit tips over ontop of them killing them. Should the unit have been able to stand given that condition? I would say no, poor supervision. None the less the law suits abound and Ikea paid.

Its the things you cant think of that make one consider insurance.

I have long been a worry wart about things like this as merely fighting a claim and winning would likely bankrupt my business. This is why I say, no kids, stuff, no toys, no kids furniture, even if its a table.

On the issue of your equipment I think you may be confusing liability insurance with property coverage. Liability doesnt cover a penny of your equipment. That would come from a property insurance policy and would be above and beyond any liability policy.

[Yonak Hawkins]

I have a business rider on my homeowner's policy for my home-based business which covers liability for guests, employees (including any "away from shop" incidents) and product and damage or loss for equipment, premises, inventory, accounts receivable and loss of income. It costs me an additional $175 per year above my normal homeowner's premium. My umbrella gives me a $1,000,000 limit.

[Matt Day]

$175?! Wow, that must be one of the examples of how insurance varies from state to state, I'd happily pay that. Mine quoted me $500 and $700 for an equipment rider.

[Harold Balzonia]

Jack, surely equipment coverage at least right?

That's where I'm struggling - where is the liability? The only thing I could think of that has really any chance of happening is a heavy person sits in a chair I made and it crumbles and a leg goes where the sun don't shine and I get a lawsuit filed against me. Sorry, I digressed there, but you know what I mean. What liability issues do I really have with tables, desks, bedroom furniture.

in your original post you said you weren't going to build chairs..... ;)

you've emphasized how small (one might say tiny) you are going to be as a business, so I'm curious as to what scale you are talking about? A project a month maybe? I might consider calling myself a woodworking "artist" and have a form letter/card that states the piece is "art" and may or may not be suited for traditional use.

ive sold many bowls, boards, and boxes and it's never occurred to me to have liability insurance in case someone drops a cutting board on their toe or pinches their finger in a box lid....

As a tiny business with maybe a couple thousand dollars a year in sales, let them sue.... Your company declares bankruptcy and closes up shop. As long as you have an LLC they cannot touch you, personally. You still get to keep your machines.

its true that anyone can sue for anything at any time, but be realistic... how many products are you going to put out every year? And how many of them will be going to friends and family who know you and care about you (probably a lot?). Are you going to be building junk for strangers that will crumble apart?

The litigious people (I use the term "people" loosely) that you are worried about only sue companies with deep pockets...

In all seriousness, go to a local craft show and talk to the guy who builds adirondak chairs (every show has them) or cutting boards, or bowls, or picture frames or whatever else. Ask them what they do for liability insurance in case a customer of theirs in injured by their product..... Or ask the lady selling home made soaps and lotions how they are prepared for a customer who wants to sue over a skin rash that might develop after using their product.... or the grandmother selling home made quilts and shawls.... kids can suffocate in those things right? You'll have all your questions answered in one afternoon.

[Yonak Hawkins]

Matt, as Jim said, go through an independent agent. Let them do the work to find you the best insurance deal for your area.

[Matt Day]

Yonak, as I've said I've talked to two local agents so far.

Harold, I agree - tiny is the right term. A project a month is probably about right or even less. My chair example was given as a conceivable reason to have liability insurance; and I'm not making them. You made some good points, thank you.

[Robert Engel]

I'm starting a small part time furniture making business and have a couple questions about what type I need. Let me first stress the word small. I am a full-time stay-at-home dad with two young kids, and I would be doing this in some of my spare time while they are at preschool. My shop is in my basement and I will be the sole proprietor. I am not going to be batching out furniture, I will most likely not sell more than $10k a year and we don't need this income - it's essentially an extension of my hobby that I'd enjoy. I do however want to do this the right way; I have an LLC and EIN, am making a website, and will also make business cards.

I plan to make custom furniture such as dining tables, benches, coffee tables, desks, bedroom sets, etc. No chairs most likely.

My main question is about liability insurance and whether or not I need it given my circumstances. I will not be installing anything in anyone's home, clients will not come to my home, and I don't see much risk where I would need liability. But I am no expert and wanted to see what others are doing. Maybe I answered my own question when I said I want to do this the right way, but I also don't want to spend money unnecessarily.

I know I need coverage for equipment and I am inventorying everything this week to come up with a replacement cost.

If any other small business owners in a similar situation could chime in with how they have their business structured, I would greatly appreciate it.

There is a LOT involved in this.

First, you need to talk to a business advisor, not an insurance agent or us folks on SMC.

We all have our opinions, and mine is you don't need liability insurance. In fact, I don't even know what it would be for given your stipulations. Unless otherwise known, your homeowners insurance or medical insurance will cover any injuries you may get in the shop.

Second, when you form an LLC or incorporate, you have legally declared yourself a business and are subject to things like occupational licensing, and inspections by the local environmental authority. You may also get inspected by the fire marshal as well as code enforcement. You may also be subject to intangible property taxes for all your equipment. There could also be issues running a commercial business out of your home.

These things I know from personal experience as a small business owner.

Then there is the IRS. If you're going to do it right, you must keep all receipts for expenses AND income. If you depreciate equipment and declare expenses for things like your personal vehicle, you're inviting an audit. This will almost certainly happen if you go a few years declaring a loss.

Bottom line: IMO you're better off working off the books until your business picks up.

[Mark Bolton]

As long as you have an LLC they cannot touch you, personally


This is not true. Any lawyer worth his/her salt, will go after a single officer of an LLC (i.e. your company doesnt have multiple, detached, officer -no husband/wife/kids/etc). An LLC doesnt protect a single individual in the same way it protects a corporation with multiple officers.

[jack duren]

Off the books. Exactly...

I ran my shop from my garage 2 years legally. Insurance is cheap and I payed taxes.. Cabinet shop, not furniture..

2015 was the first year since 1999 I didn't turn in a business...

It's not that complicated atleast in Kansas city.

Always turn in a profit....

[Don Jarvie]

What Robert said. No offense but have you sold anything yet? Do you have any orders? If you sold something how much profit did you make after paying yourself an hourly wage?

I completely understand your thought process but once it's all said and done how much have you paid to set up a business that you may not be able to recoup your costs for quite a while.

My advice is to get some orders, make a few items and evaluate if going the business route is feasible.

[Victor Robinson]

I don't want to interject an opinion where it may not be wanted or looked for, but I'm going to anyways because it's the internets and we all like to hear ourselves type.

I've been down this road with one hobby, and have worked very hard to make sure it doesn't happen with THIS one. Often the allure of turning a hobby into a small business is the tax benefit of writing off the equipment. You figure maybe the hobby can pay for itself with a little bit of work - no big deal because you enjoy it, right? The overhead as you become legit starts to add up, and so can the headaches gradually (Robert alluded to some good ones), and it might stop being worth your while when you do the math, financially and in terms of the intangibles. I say MIGHT because it doesn't have to go that way, but there's luck involved too and you can't entirely prevent all of the headaches that can come with running a business simply by planning. It helps to firmly know whether you really want to run a business (and are ready to go with it as big and complicated as it gets) or whether you most importantly want to enjoy your hobby. Sometimes that distinction is not clear until you've gone through the process before. It's my personal opinion and experience that you can enjoy your hobby with a few commissions here and there without being a full-blown business. Pay tax on the extra personal income. See where it goes, then sign up for the trials and tribulations of running a business. And if some of the impetus is the write-off, you can always go back and "re-buy" your equipment if you want to move it from a personal expense to a business one.

Anyways, sorry for the digression - I'm sure you've thought a lot about this and I don't mean to be an annoying been-there-done-that kind of guy, just looking out for another SAHD.

[Matt Day]

Don,
I have not sold anything yet. I haven't finished my website yet or done any advertising/social media/emailing. I want to get my ducks in a row first. My costs so far are $100 for the LLC and a background for photography so I'm not at all in deep.

[andrew whicker]

So I started a LLC. I have business cards. I hope to turn this into a full time business.

I have a few orders. So far, they have been to people that know me thru the community (not necessarily friends). I've only been paid in cash and I've been under charging to be 100% honest (confidence and all that). I just went to a chamber of commerce meeting yesterday (free) and will continue to go. I use instagram and facebook for my advertising (free).

I haven't even begun to start to think about insurance. I have yet to put one cost / profit on my LLC because I'd rather just take cash. What's the point of paying taxes and getting the gov't involved if I don't have to?

I work 4 days a week as an engineer and bust ass when I have to on nights and weekends. I'm getting fatter and have a harder time hanging out with friends. I'm getting to the point where I have to either fully commit or just do it as a hobby. But, I will say this about myself: I find the running a business aspect much more appealing than doing woodworking / fab my entire life, so there's that. (If I picture myself 60 yrs old)

Anyway, I have a few picture frame orders for this week / month, but the woman isn't getting back to me. Another person took some awesome frames I made and then moved out of state and left me high and dry (sweet). I took two nights off and now I need to make something else and see if I can't sell it or find someone that wants something (read: spend my own cash up front and hope it sells). Gotta keep momentum..

[Robert Engel]

Matt,

Please don't misunderstand nobody is discouraging, just pointing out some of the considerations in starting an actual business.

I would take it in stages. I think you've got a good plan but keep your out of pocket expenses down right now. I know a couple people who have built fairly successful businesses on nothing but Facebook (not ww'ing but principle applies).

One thing I would suggest is keep building projects in order to build a portfolio.

Nothing will impress a potential client more than being able to touch what you can do.

[Larry Edgerton]

I've gotten a lot of responses but I don't know how many have their own furniture business. I'd really like to hear from folks that are in business, not just speculating.

Matt

I am working full time at it so on a different scale, but...... Here is how I see it.

Everything I own is paid for. I'm 60 years old. I do not have enough energy left at my age to bounce back from a catastrophic law suite. Legal fees alone could ruin me financially.

So....... Even though I have slowed down and do a 10th of the business that I used to, I still carry a liability policy. It costs me $55 dollars a month for the piece of mind that I have coverage in case something happens with one of my products. Have not used it in 30 years, and at times it seems like a waste, but in this age of litigation who knows?

My suggestion is add the insurance into the cost of your work and don't look back. If you are not making enough to cover the cost of the insurance, you are wasting your time, take up golf.

[David Kumm]

Good insurance is far more important than the type of business entity for liability. A Corporation or LLC do NOT absolve an owner from his own neligence. Great when you have employees and want to protect personal assets, but if you screw up personally, everything is likely on the table. For any entity protection period, the business must be adequately capitalized and carry appropriate insurance, operate as a separate entity, hold meetings, have an operating agreement, etc, etc. Not easy to do if you are the Lone Ranger.

A single member LLC is cheap to set up so there is only upside but don't lull yourself into thinking it really adds much protection from your own acts. Dave

[Matt Day]

Thank you for the advice Larry and Dave.

I don't want to take up golf. Building furniture is rewarding for me and making a few bucks would be nice too. It's also something else to teach my kids to use their hands and their minds. Lastly, my father finished making furniture for his home years ago and basically gave it up - I don't want to do that.

I know that LLCs are not bulletproof. If I were to have a lawsuit, one thing I heard is that liability can cover the legal fees. I know that can get expensive so that would be a major positive to it. Is that true?

[David Kumm]

Insurance policies may cover legal fees depending on the policy. No free luch though. If you ever have a claim, you will eventually repay the insurance company. Don't take a job where you can't handle the risk if your project fails. The size of the project must be approporiate for your size. Dave