Types of Insurance Based on Company Structure

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As a new business owner, one of the first decisions you need to make will be deciding on a business structure. There are several different company structures available depending on your needs and goals. There are many things you should consider when choosing your business structure such as taxes, financing, profits, and of course insurance. While every business has similar needs when it comes to insurance there can be some subtle, but critical differences you should be aware of.

Why Do Corporations Need Insurance?

If you have big goals and dreams for your business and plan to grow exponentially and have a lot of investors, then a corporation is for you. It is great in that it allows an unlimited amount of people to be part of the structure and offers the most liability protection for individuals. There are also many tax benefits to this type of company structure. An attractive factor currently to choose a corporation is the recent tax reduction that happened in 2018 at 21% from 35%. This means more money in the shareholders' pockets.

One of the biggest downsides to structuring your business as a corporation is the time and energy it takes to do so. You must have a board of directors who have monthly meetings and those meetings must have recorded minutes. And a corporation is held to a higher standard by governments and have more laws and regulations that they must follow. You must weigh the advantages and disadvantages of forming a corporation when making this important decision. Another essential factor to consider is insurance needs. Usually, a corporation will need the most insurance depending on the size of the company. Here are some critical insurance policies a corporation should have.

  • General Liability – While the individuals of the corporation have the best liability protection under a corporation, the business is still at risk for claims from third parties for all sorts of reasons. General Liability is going to be your first line of defense for most of them, like bodily injury, property damage, and personal injury. Usually, a business will start its insurance portfolio here and build on it. Often you can bundle this with Property coverage to receive a discount depending on the size and operations of your business.
  • Commercial Property – Your business will likely own property, whether that means a building, business personal property, equipment, or all the above. Protecting it from things like fire, wind, theft, and lightning is imperative to smooth business operations. If your building is damaged by a fire you will want to be able to get it repaired quickly and the best and most affordable way to do this is to have Commercial Property insurance.
  • Directors and Officers – Having a board of directors is a great way to make sure your business continues to run smoothly but they have their own set of risks and will not be protected from liability under the corporation. Directors and Officers insurance, or D&O, will help to protect their assets if they are sued for things like mismanagement of funds.
  • Cyber Liability – With so much of our lives now being dependent on technology and being able to quickly and seamlessly do things, Cyber Liability is a must for a corporation. According to IBM Security (ibm.com), the average cost of a data breach in 2019 was 3.92 million with the United States being the most expensive country. Do you have 4 million in your pocket?
  • Commercial Auto – If your business used vehicles for its operations then you will need a Commercial Auto insurance policy. Unfortunately, our Personal Auto insurance policies do not cover claims if the vehicle is being used for business, even if it is a private passenger auto. Another great thing about Commercial Auto insurance is that you can also add Hired and Non-owned Auto coverage in case your employees use their vehicles for business. If they are at fault in an accident and get sued while on the clock, your corporation could be named in the lawsuit as well.
  • Employment Practices – If you have employees you will certainly need Employment Practices Liability insurance. In today’s litigious society it is imperative that you protect your business from those things that you may think will never happen to you. Lawsuits from employees or ex-employees alleging things like harassment, discrimination, wrongful termination, and wage issues are enough to put you out of business without the proper protection. Even family-owned businesses are seeing these types of lawsuits.
  • Workers Compensation – Employees are a great asset when you are growing your business and want to spend your time doing other things. However, if they suffer a work-related injury or illness your business will be responsible for their medical expenses and lost wages. Workers Compensation will cover both of these expenses. It is a great policy to have because it lets the employees know that they will be supported if something unfortunate happens, and helps to encourage them to get back to work.

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Limited Liability Partnership (LLP) And Insurance

When choosing your business structure, you might want something that involves a little bit less work than a corporation, but still gives great tax benefits. This is where a Limited Liability Partnership, or LLP, comes in. An LLP is a great entity to choose if you are looking for partners but do not necessarily want them to be active in the business, or if they do not want to be active as well. The downside is if you are a general partner, usually the one running the show, you have full liability exposure, while the limited partner has only the exposure of what they invested.

When it comes to insurance, a Limited Liability Partnership is going to need pretty much the same policies as a corporation outlined above. Depending on your operations you may not need the same coverage amounts but the policies will be similar. If you don’t have employees then you can remove Workers Compensation and Employment Practices from your list since you will not have the exposure. Additionally, there usually is not a board of directors with an LLP so you would not need Directors and Officers insurance. Cyber Liability may also not be needed if you are using an LLP as an investment entity to purchase things like real estate.

How Is A Public Benefit Corporation Different from an LLC?

A public benefit corporation is usually formed when a business is going to do something that benefits the public interest and also has shareholders, where an LLC does not. An LLC simply has members. Think of companies like Kickstarter. They were formed to help the public raise funds to start business ventures. They are not a non-profit and they have shareholders so a public benefit corporation was a better company structure for them. When it comes to insurance needs, they are very similar, however, if there is no board of directors or employees you can see how the exposure would be different.

Does A Sole Proprietor Need Commercial Insurance?

While a sole proprietor may have less exposure due to not having employees and dealing with a smaller number of customers over the course of a year, they must have Commercial insurance. Customers can still slip and fall, you can still damage property, and mistakes can still be made. In addition to General Liability, Property, and Auto insurance please consider the following as a sole proprietor.

  1. Professional Liability/E&O – A business that offers professional services should consider purchasing Professional Liability. Professions like consulting, contractors, insurance agents, home inspectors, and interior designers are good candidates for this coverage. It will protect your Errors and Omissions. Unfortunately, as a human, you can make mistakes and one mistake can have a negative financial impact on your customers and if that is the case, you are likely to be sued. The best part about E&O insurance is it will provide defense costs.
  2. Health Insurance – As a sole proprietor, you should have health insurance. If you are sick then you need to be able to pay to get medical attention and medicine if necessary. Without health insurance, you could eat away all of your profit with one visit to the hospital. There are many different options for health insurance to fit every budget.
  3. Disability Insurance – If you get hurt so badly, whether at work or not, that you are unable to work you will want to have disability coverage. A sole proprietor is not usually going to purchase Workers Compensation, and health insurance will not pay for lost wages. Even though it will be a reduced amount, something is better than nothing when it comes to supporting yourself and your family. Even if you are only injured for a short amount of time, as a sole proprietor, every minute lost is money lost.

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