The type of organization can have a bearing on the degree to which you are personally liable for obligations of the business.
Unincorporated Businesses:
Unincorporated businesses are by far the most common type of business.
The three basic forms of unincorporated business enterprises are
1. Proprietorships (easiest to form and terminate). This is the most common form of business enterprise. Most proprietorships 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 and personal debts. Business misfortune can cause personal financial distress.
2. Partnerships. State laws lay out the legal principles that govern these. Allows for additional input of expertise or capital or time. General partners of businesses also have essentially unlimited exposure.
3. Limited-liability companies. These are the fastest growing form of company. They allow limited liability, flexibility of partnership taxation, and are attractive to people who desire to be limited partners (with limited liability) and supply investment capital, but not become involved in the active management of the company. A variation of this is the registered limited liability partnership which operates as a normal general partnership and offers liability protection for all partners.
Incorporated Businesses:
The 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 laws of the various states. Advantages of the corporate form include limited liability, continuity of life, and various tax advantages. Corporations range from small scale to very large. Very large corporations usually have a department that manages the various aspects of risk planning and business and insurance planning. Corporations are taxed as separate taxpayers with rates different from those applicable to individuals. These tax considerations affect some aspects of insurance planning for corporations.
Corporations can be one of two general types (C corporation – the ordinary type, or S Corporation – which has a different type of taxation)
A review should be done periodically. Once a year might be appropriate for many businesses. Many insurance premiums come due or up for reevaluation annually. That would be a good time to consider any changes in your risk analysis. You should also consider a review whenever you business:
1. gets larger or smaller
2. changes its nature as when it diversifies into new businesses or markets or products
3. relocates
4. anytime your business evolves in any way that could change your risk profile.
The primary ways of dealing with risk include:
1. Find ways to avoid risks such as eliminating potentially hazardous products or procedures
2. Reduce the frequency or severity of risks that cannot be eliminated
3. Transfer the risk to an insurance company (or perhaps to another party by means of legal agreements that your business will be “held harmless”).
The size of the company, type of industry, type of organizational structure, capitalization, geographical area, management team, degree of experience and expertise in the targeted business, capitalization, competitive environment and many other factors can have a bearing on the risk environment for the company. The business owners should address such issues in their business and strategic analyses of the company’s situation. A few of the potential operational risks are as follows:
1. Risk of Property Damage
2. Risk of Inventory Loss or Damage (through spoilage, etc.)
3.Risk of Loss from Employee Theft
4. Risk from Various Liabilities (including injuries to customers or to others)
5.Risk from Errors and Omissions Liabilities
6.Business interruption Risks
Other risks involve the business’s employees and may call for optional or mandatory insurance coverage:
1. Worker’s compensation
2. Unemployment
3. Employee benefits
Some additional risks relate to the owners and their ability to continue the business in the event of serious losses
1. Risk of death of an owner or key employee
2. Risk of disability of an owner or key employee.
Risk analysis is a process by which you consider all possible risks and determine which are the most significant for your particular business. It may make sense to mitigate some risks by purchasing insurance. Other risks can be eliminated without purchasing insurance. After considering how likely various losses are to occur, how expensive they are to mitigate and how much money you have to spend, you decide the optimum strategy for dealing with the various risks.
Running a business is inherently risky. Many factors outside the control of the business owner can influence the success or failure of the enterprise and a high percentage of new businesses fail within a few months of inception. Even large and successful businesses can succumb to changing conditions. Consider what has happened to some of the largest companies in industries such as automobiles, telecommunications, computers, and railroads. To improve the probability of success, the management of a business should think about potential risks and how to offset them.
The losses to a business caused by increased expenses or decreased revenues could threaten the livelihood of the owner or owners. A realistic analysis of the risks inherent in the business and a plan for dealing with them will protect the business from unanticipated losses and disruptions to its flow of income.
A: It used to be that the only people who needed personal umbrella liability policies were wealthy individuals who had sizable amounts of personal assets that would be at risk in a lawsuit. However, in our very litigious society, even individuals with modest incomes and assets are often subjects of large lawsuits. Since they are even less able than a wealthy individual to pay large damage awards, they recognize the need to have coverage limits greater than what can be obtained from their homeowner or auto policies.
A: A personal umbrella liability policy is designed to increase your liability protection. This single policy acts as an “umbrella” over all of your other personal liability policies (home, auto, boat, RV, etc.) so that you have a higher personal liability limit than what would otherwise be available. In certain circumstances, an umbrella policy may provide personal liability coverage that is otherwise excluded from your other policies. For example, an umbrella policy provides coverage anywhere in the world, whereas your auto policy usually provides coverage in the U.S. and Canada only.
A: Standard renter’s policies cover only you and relatives that live with you. If your roommate is not a relative, each of you will need your own renter’s policy to cover your own property and to provide you liability coverage for your own actions.
A: Owners of apartment complexes buy insurance policies for their liability and to cover their buildings and personal property. However, these policies do not cover any of the tenant’s property or liability. By requiring their tenants to have renters insurance, the apartment owner is assured that the tenants will not mistakenly believe the apartment complex owner’s policy will provide coverage for a tenant’s property or personal liability. Although this type of requirement benefits that apartment complex owner, there are benefits to the renter as well. We recommend that you purchase renters insurance regardless of what your landlord requires.