Running any business is rewarding, but it also comes with risks.
No matter how prepared you think you are, there will always be challenging instances. And you need to make sure you're well-protected. From financial protection to preserving your brand and reputation, business insurance can help shield you from a business disaster.
Insurance is crucial in any business, regardless or size, nature, or industry. It provides protection against claims that can otherwise leave a huge dent in your finances. With all the things that can go wrong, it's essential to have something to rely on in case something happens — even when it's not your fault.
Let's start from the beginning.
Liabilities Depend on Business Structure
When forming a business it's important that you choose the right business structure. Sole proprietorships, limited liability companies (LLC), and corporations come with different liabilities which can also affect the coverage needed by your business.
- Sole proprietorship — The least complicated structure, making it an ideal choice for those who have home-based businesses or startups. It refers to an unincorporated business that operates as an extension of a single owner. This means the business's income will be considered earned income under the tax return of the sole proprietor. In this business structure, the liabilities of the business will also be the owner's responsibility.
Example: Kurt owns a local barber shop called Kurt's Kuts. But if one of his employees feels like he's taken too much off around the edges when it comes to payroll and employee management, Kurt could be personally liable if the employee files a complaint — which could mean prosecution and fines.
- Limited Liability Company (LLC) — When a small business starts earning more money and dealing with numerous customers or clients, it's better to turn it into an LLC, mainly for legal protection. In this business structure, the owners and officers or directors, if any, are protected against the financial and legal liabilities of the company. Bear in mind that single-member LLCs usually receive the same treatment as a sole proprietorship. This means the income from the business will flow through the personal tax return of the owner.
Example: Helen and Angela are partners in the HA HA Bakery. But if one of their employees isn't feeling so sweet on the business, Helen and Angela could be personally liable.
- Corporation — If the business is formed and operated by several owners, the best structure would be a corporation. This is where stockholders elect a board of directors that will manage the business. Many states have specific tax laws on corporations. This structure also creates a protective barrier between the shareholders and the business, meaning the owners cannot be held liable for any damages caused by the operations of the corporation.
Example: Ted's timekeeping app has gone from startup to unicorn in record time. As his company grew, he incorporated. This means he's not protected by something called the "corporate veil" which makes the business its own entity in terms of liability.
How do Payroll and Insurance Intersect?
Just like any crucial part of your business, bug issues can arise if you don't handle your payroll correctly — and those mistakes are what you need to be insured for. Not paying your employees on time or skirting tax laws can cost you big time.
Since most business owners aren't payroll experts, it's important to first identify potential problems so you can choose the insurance plan that's best for you.
Once you've determined your risks and needs, you can start looking at the different types of plans outlined below:
- Fiduciary Liability Insurance — Errors in administrative tasks, including the handling of employee records, termination within an Employee Retirement Income Security Act (ERISA)-governed plan, delayed balance transfers, and other issues can lead to personal liability lawsuits. To protect your business against claims related to these risks, you may want to consider getting fiduciary liability insurance — this type of insurance coverage provides protection that extends to fiduciaries or trustees.
Many think that a fiduciary bond — which is a legal requirement — is enough protection against lawsuits. What they fail to understand is the fiduciary or trustee is still vulnerable due to steps taken as a trustee. When this happens, even the personal assets, such as the place of residence and savings of the trustee, will be at risk.
Fiduciary liability insurance may not be required by law, but it can provide adequate protection that fiduciaries need against huge financial losses, such as covering the legal expenses as well as claims for covered risks.
- Employment Practices Liability Insurance — Employees can file claims against the employer for a wide range of reasons, including wrongful termination, harassment, failure to promote, breach of contract, and discrimination based on age, race, disability, or gender preference. For claims about employment issues, the business can be protected through employment practices liability insurance.
In general, large businesses have adequate insurance coverage to handle any lawsuit filed by workers. The same cannot be said regarding startups and small businesses — they usually don't have a solid legal team or guidelines that enumerate the policies associated with hiring and terminating employees. Bear in mind that employees are not the only ones who can file claims and lawsuits — even former workers and job candidates can, too.
How much does it cost? That depends on various factors, including the size of the workforce, rate of employee turnover, presence or absence of rules and policies, and whether there are previous lawsuits against your business.
One thing to remember about this type of insurance coverage is that in general, it's written on a claims-made basis, which means you will only be compensated for qualified incidents that occur within the coverage period. This is crucial since in many cases, months or years have passes before an employment-related lawsuit is received. If this happens and your company no longer has coverage, you may be at risk of losing a huge amount of money.
Don't Put Yourself at Risk
Doling out another expense for business insurance doesn't always seem like it's worth it, but in the long run, it can save your business.
Getting caught up in a liability lawsuit not only refocuses your money, but also distracts you from running your business efficiently. Having an extra layer of protection should ease your mind and let you get back to what you do best.
The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.
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