Having business insurance as a corporation is a smart decision. A corporation protects you from personal liability, but business insurance can protect your corporation from paying legal costs and damage awards. This means you won't need to worry about a corporate bankruptcy if someone sues your business for negligence, bodily injuries, or property damage.
This article explains the benefits of business insurance and why it remains vital even if you incorporate your business.
What is business insurance?
Business insurance, also known as a business owners' policy, encompasses several insurance coverages that every small business owner should buy. These insurance products protect you and your business from legal liability and other financial fallouts, so your company doesn't face sudden costs that jeopardize its bottom line.
Three common policies in a business insurance plan include:
- Professional liability insurance: This coverage protects your company if a client sues due to a negligent or misrepresented provision of services. This includes missed deadlines, poor quality of service, errors and omissions, etc.
- General liability insurance: This policy covers bodily injury and property damage lawsuits. It protects your business when a client or third party slips and falls or trips or if you damage a client's property in the course of your service provisions.
- Contents insurance: Contents coverage protects your business' assets like equipment, electronics, and office furniture. If your belongings are lost, stolen, damaged, or destroyed, this type of insurance can provide replacement or repair costs.
Does business insurance and incorporation do the same thing?
Business insurance and incorporation both reduce legal liabilities, but they have different benefits and uses. Even if you have a corporation, it's always a good idea to purchase business insurance.
Benefits of business insurance
Business insurance often pays for legal fees and damage awards on behalf of yourself or your corporation if someone sues. A corporation means you and your business are separate entities. So, you're generally not responsible for a lawsuit against your business.
Incorporation can protect you from lawsuits, but your company is still liable. Without the proper business insurance, your company still has to pay legal fees and damage awards out of pocket.
Although your corporation could declare bankruptcy, this process is cumbersome and could have personal consequences. That's why business insurance remains critical even after incorporation.
Additionally, incorporation can't provide the protections of contents insurance. No matter what legal structure you use, no one will compensate you if your office faces a flood and you need to replace furniture and computers unless you have insurance.
Some business insurance plans also offer business interruption protection. Similar to contents coverage, this isn't something incorporation replaces. Business interruption insurance provides compensation for what your business would have earned if you can’t operate due to unfortunate circumstances.
For example, suppose your gym faced a fire, and as a result, you need to close for two weeks. During this time, you're losing out on a ton of sales.
If your gym insurance policy has business interruption coverage, it could provide your business with what it would've otherwise earned during these two weeks – so an event out of your control doesn't leave you with a financial loss.
And even if you incorporate, clients or landlords might still require you to have a business insurance plan. Your business insurance plan protects others from risks because they know they can claim your policy if anything goes wrong.
Imagine your technology consulting business makes a major error that costs your client millions of dollars. They're going to sue you for millions of dollars as a result. Your client knows your IT consulting insurance policy can compensate them for their losses if you're insured. Without coverage, however, you might instead declare bankruptcy, and your client is left with a multi-million-dollar loss.
Benefits of a corporation
Incorporating your business does more than occasionally save you from personal liability. There are numerous tax benefits to a corporation. It also lets more than one person own the business and allows a company to survive even if its owner passes away.
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Do I need to incorporate if I have business insurance?
Whether you should incorporate depends on your business' circumstances. Speak with an accountant or corporate lawyer to determine whether it would be useful.
If you only want to incorporate your business to protect yourself from legal liability, you might be better off with business insurance. Corporations involve a lot of costs and maintenance fees, paperwork, and government compliance – a business owners' policy can be more convenient.
Otherwise, incorporation is important for other reasons. It might mean net tax savings or the ability to defer tax, the ability to exchange company ownership, an easier path to financing, and more. These are the benefits of incorporation that insurance can't provide.
The bottom line
Both business insurance and incorporation can protect you from legal liability. But, it's vital to understand that business insurance and incorporation are not substitutes for each other. Both a business owners' policy and incorporation have unique benefits that the other can't replicate.
Get a business insurance quote and buy your owners' policy online with APOLLO Insurance. Our online portal lets you quote, purchase, and bind your policy in under five minutes. You can do this from anywhere, on any device, and at any time.