Phosphorus-containing flame retardant water-dispersed polyurethane coatings were produced by incorporating different amounts of a phosphorus compound onto the polyurethane main chain. The novel phosphorus containing compound (phosphorus phenyl dihydroxy) was synthesized in three steps using benzaldehyde, pentaerythritol, phenyl phosphonic dichloride, and acetic acid. The addition of phosphorus phenyl dihydroxy to the main chain of polyurethane, in which NCO/OH ratio was kept constant at 1.5 and the amount of dimethylolpropionic acid (DMPA) at 3.5 wt%, increased the hardness and abrasion resistance, but only slightly decreased the glass values of the polyurethane paints. All the samples showed superior impact resistance and flexibility. Moreover, increasing the phosphorus content increased the char yield, and the maximum fire retardancy was reached at 1.5% P content with a limiting oxygen index (LOI) value of 29.