The terms sole proprietor, LLC (limited liability company), and corporation all mean different things to your insurance risk. The word risk simply refers to the possibility of losses. When you purchase an insurance policy and your business will (and should) purchase an insurance policy as soon as possible, insurance brokers will analyze and categorize your risk.
The bigger the company, the greater the risk, and that’s what we’ll cover today.
Read on to learn the difference between a sole proprietorship, LLC, and corporation, and how they translate into different levels of risk.
Sole owner
A sole proprietorship is the simplest risk structure. If someone is a sole proprietor, often called an individual entrepreneur, they are the sole owner of an unincorporated business. For most people, it’s the easiest business to start and one of the most common. Nowadays, it is more common for people to start their own business without a business partner. For example, digital nomads and content creators are thriving in 2024 and are most often sole proprietors.
A sole proprietor can run their business using a personal bank account if they choose, and personal and business income are generally the same. Despite this, a sole proprietorship business owner will still need to register as a business and hold the required licenses.
Risk: Because your business is tied to your name, it can be difficult to obtain business credit and loans. There is so much more risk for lenders. And in terms of insurance, insurance policies are often granted with unlimited personal liability on personal property. The risk for insurers is not necessarily high, but it is for the individual.
SARL
A limited liability company is the next step.
An LLC is a type of business structure that provides limited liability protection (hence the name) to business owners, but comes with tax benefits and management flexibility. Although different from a sole proprietorship, it is a sort of hybrid approach. The structure still combines the features of a sole proprietorship, such as flow-through tax, with the risk associated with the limited liability of a corporation rather than an individual.
LLCs are the fastest growing type of business in America, with 21.6 million currently registered.
Risk: The risk is that companies lose their SARL status and the advantages that flow from it as soon as they have obtained it if they make mistakes, for example in tax matters. For insurance, an LLC generally carries more risk and must carry a general liability insurance policy. This will cover everything from property damage to workplace accidents and workers compensation insurance by Next Insuranceand much more. This is something that individual businesses generally do not seek coverage for.
Corporation
A corporation is the most complex structure of the three and has the greatest legal distance between the individual and the business. When a person forms a corporation, they create a separate legal entity. This entity owns the assets, signs the contracts, pays the taxes and holds the liabilities. You may work for your company, but legally you are not your company. All of this equals more risk.
There are two common types of corporations in the United States: C-Corps and S-Corps. C-corps are taxed separately from owners, while S-corps allow profits and losses to be reflected on individual tax returns. This means you can choose how your business income is taxed based on what suits your growth plan.
Risk: A company offers the highest protection in terms of personal responsibility. This is why it is the ideal solution for larger operations. However, this does not mean that the risk disappears. It just changes. Due to their size and complexity, companies are subject to the greatest scrutiny from insurers.
Premiums are higher. Expectations are higher. You need comprehensive policies that often include directors and officers insurance, data breach coverage, product liability and employer liability. If something goes wrong, it’s rarely a small thing. This is why the roofing must be as complex as the structure itself.
The way your business is structured changes everything, especially when it comes to risk. There is no one-size-fits-all solution. It all depends on the type of risk you are willing to take on and what you want your insurance to cover.
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