Can Changing Your Legal Entity Status Affect Your Insurance?
As your business begins to flourish you may see the need to take it to the next level. The simple business structure you started not too long ago has outgrown itself. You need more out of the current structure you have in place. It may be time for an entity change. This can cause you concern because you are unsure of how a change will affect your insurance. First, let us look at the reasons why you would want to make a change. Then we will look at the effects such changes could have on your business.
Reasons Why You Would Want to Change
The success of your business is a good thing. As it grows, your needs shift that will require a change in status. From a Sole Proprietorship to a Partnership, an LLC to a Corporation, or a variation of those can warrant a change. Among these needs for change are:
- Tax Reasons. If you are moving your company from pass-through entity to another status that would require you to pay taxes on the net income of the business.
- Hiring Employees. As your business expands, you hire new employees. The more employees you have, the more vulnerable you will be to lawsuits.
- Going Public. If you are ready to take that next step and place your business open to purchase shares of your company, you would want to adjust your current structure.
- Liability Protection. You may want to consider additional protection should your business grow, and responsibility falls on more than just the owner.
- Ownership Changes. -Internal ownership leaving the company, or new ones being added, may suggest a structural
The Effects that Could Arise from a Change in Entity
Changing your entity will require a name change. For instance, adding LLC or Inc. to your company name. For most kinds of insurance, you will only have to make a “named insured” change to the policy. While this may be a minor adjustment, there are a few things you will need to consider when making that entity change.
How your taxes are paid. -If you are changing from a sole proprietor to a partnership or corporation, then you are no longer filing your taxes through your personal taxes. It now becomes a separate filing. Law requires you to notify federal, state, and local taxing and licensing authorities. This type of change will require you to obtain an Employer ID Number.
How Workers Compensation works. -Employees and their benefits determine workers Comp insurance. With an entity change because of a growth in your workforce, a new Workers Comp policy will need to be drafted to cover your added liabilities.
Business overall liability. -With additions to your business, like employees and property, comes added liability. If your current policy does not give you adequate coverage, then a new policy or the addition of policies like a Commercial Umbrella policy, will need to be considered to cover yourself in the event of a lawsuit.
Of course, there will be paperwork to fill out and fees to be paid, this needs consideration as well. Remember to notify all the parties this type of change could affect; your financial institution, your vendors, and most of all your clients.
Should your business make changes to its scope of business, then a new insurance policy would need to be created. Taking your business in another direction can cause higher risk and have different liabilities than your current status. Changes in ownership could also cause a need for a new policy. An insurance advisor can assist you with assessing risks and determining a policy that will meet the needs of your new course.
Keep in mind that changes in entity status vary from state to state. In some states, the old business would need to be dissolved, and a new one would need to be formed, thus requiring new insurance policies across the board. You may also need to reapply for licenses that are relevant to your old business structure.
To learn more about the effects changing your legal entity status has on your bottom line, contact the experts at www.demontinsurance.com at (800) 522-1997. Our licensed insurance experts will be happy to answer any questions you have.