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Business Insurance Q & As
The structure of any organization can factor into your business risk and ultimately into your choice of the type of business insurance. Different businesses bring different risks to the table, so every company requires a risk analysis in order select the best type of business insurance to manage the problems it faces. Determine what risks most affect your type of business, and get the right insurance plan to fit your needs.
Unincorporated Businesses, Degree of Risk and Business Insurance Types
Unincorporated businesses include Proprietorships, partnerships and limited liability corporations. Read each to review the personal liability in each.
- Proprietorships (easiest to form and terminate). This is the most common form of business enterprise. Most businesses formed under proprietorship are small. The proprietor faces the greatest risk exposure of any business owner since the business and personal assets of the proprietor are legally indistinguishable - as are business debts and personal debts. Business misfortune can cause personal financial distress. Choose the type of business insurance with the appropriate limits that will give you a high degree of coverage. Discuss your personal financial risk with a lawyer and determine if there is anything which you can do outside of purchasing the right type of business insurance that can help to protect you assets
- Partnerships are governed by state laws which lay out the legal principles that form this entity. Generally, partners of businesses also have essentially unlimited exposure. This entity also requires extreme care in purchasing the correct type of business insurance to shield your personal asset. Again, make sure you limits are appropriate for your risk. There are other types of partnership insurance including key man insurance that could be right for your business. Check with your agent if this business insurance type is right for your partnership.
- Limited-liability companies or LLC's allow flexibility of partnership taxation, and are attractive to people who desire to be limited partners (with limited liability). A variation of this is the registered limited liability partnership which operates as a normal general partnership and offers liability protection for all partners. This entity however does not protect your personal assets should you get sued.
With each of these entities, the business owner would need to consider their personal financial risk if the business were to be drawn into a law suit. Choosing a business insurance type that provides adequate coverage for your degree of risk as well as designing higher insurance limits that will give you the appropriate coverage in order to protect personal finances will give you the overall protection needed.
TIP: Make sure you consider your type of business entity and it's over all degree of risk for your personal finances when designing a risk management plan for your business. Know what business insurance covers and what your needs are, and find the right plan for you!
Incorporated Businesses and Types of Business Insurance
Having your business incorporated is another choice. A corporation is another form of business organization. A corporation exists as a legal entity separate and apart from its owners. It is created under the various laws of each state. One of the advantages of having a corporate entity form includes limited liability. Corporations range from small scale to very large.
Having this corporate shield, or veil, allows the corporation's owner to be protected from various liabilities of the corporations. This means, if the corporation is sued for business related damages or injury, the corporation's owners have the best protection by having this type business entity. This does not mean however, that a corporation can do without any type of business insurance. What this does mean is that when planning the corporation's risk management program, choose a type of business insurance or insurance limits that will give the corporation adequate coverage knowing the entity's shield adds an additional layer of protection.
TIP: BE CAREFUL! There are some actions which will allow a court of law to pierce the corporate veil and go after personal assets of the owners. Discuss these actions in conjunction with your type of business with a business attorney to avoid any such actions.
Closely Held Corporation and Business Insurance Type
A closely held corporation has a small number of shareholders, no public market for the corporate stock and the ownership and management overlap. Many small closely held corporations are functionally not different from small unincorporated businesses in such matters as how they operate, make decisions and raise capital. Despite the difference in liability exposure, some lenders have been known to require managements of small corporations to pledge personal assets to secure business loans. They could also quite possibly have personal finances drawn into lawsuit settlements. Before deciding on this business entity type, discuss this issue with your business attorney. Ask your insurance agent if perhaps carrying increased limits on your general liability coverage as well as obtaining business umbrella liability policy may give you the additional risk coverage needed.
Considering the business or service type and its legal entity is the best way to design a risk management program which includes the right type of business insurance. Which type of business insurance you choose really depends on the size of your business, the risk inherent with your business, the legal entity you are operating under and your insurance budget. One way to work stay within your budget and still get the type of business insurance your need is to get several comparison quotes.