08 Jan Did You Change Your Business Structure From A Sole Proprietor To An LLC?
Often entrepreneurs start their business as a Sole Proprietor. This is the easiest type of business to set up and the paperwork is minimal. However, if you are taking on a partner or as your business grows often your financial adviser or lawyer will recommend you change your business status to a Limited Liability Corporation, LLC. When you decide to make that change your tax accountant and lawyer will help you file the appropriate paper work with the Federal and State agencies, however often they forget to tell you to call your insurance agent and up date your business insurance. You must change who is named insured when you add the LLC to your business name.
Who Is An Insured:
Your General Liability Insurance Policy has a definition of who is insured. If you take the time to read it the first sentence in the Section title “Who Is An Insured” states:
If you are designated in the Declarations as: then they give you a list.
a. An individual (sole proprietor) you and your spouse are insured, but only respects to the conduct of a business of which you are the sole owner.
b. A partnership or joint venture
c. A limited liability company
d.An organization other than a partnership, joint venture or limited liability company
e. A trust
Mind you this is a list of the types of legal business entities that your General Liability will cover. It is not a list of the who is covered. The who is covered must be clearly stated on the Declaration Page of your General Liability Policy. Below is an example of a Declaration Page.
What Changes When You Become and LLC?
One of the reasons your lawyer or tax accountant told you to become an LLC is it changes your Personal Liability exposure. When you are a sole proprietor, you and your business are viewed as one in the same. Therefore, you have unlimited personal liability for all of the debts and legal liabilities of your sole proprietor business. Your personal assets, such as your home or personal bank account, could be at risk to satisfy unpaid debts, legal judgments, and other legal obligations of your start-up.
When you become a LLC your business becomes a separate legal entity and a LLC member is normally not personally liable for the LLC’s debts or legal liabilities. As an LLC owner, you are mainly putting your financial contribution to your LLC, not your other personal assets, on the line. However, as an LLC owner, you may still be personally liable for your own conduct or LLC loans in some cases. For example, you may still be responsible if you personally guaranteed repayment of an LLC loan or if your own acts cause harm to a third party or to your LLC.
When you change your business name from John Smith Construction (sole proprietor) to John Smith Construction LLC (corporation) you have changed “Who Is Insured”. The “Who Is Insured” must match your corporate name on all your business insurance policies, the General Liability, Business Auto, Worker Compensation, and your Bond. You do not want a claim denied because the insurance company thought they were insuring you and not your corporation. Call us and we will be happy to make this change for you.
If you have any questions, please do not hesitate to give me a call at 800-452-6826
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