The terms sole proprietor, LLC (limited liability company), and corporation all mean different things for your insurance risk. The word risk simply refers to the possibility of losses. When you take out an insurance policy, and your business will (and should) take out an insurance policy as early as possible, insurance brokers will analyze and categorize your risk.
The bigger the business, the bigger the risk, and that’s what we’ll get into today.
Read on to learn about the difference between a sole proprietorship, an LLC, and a corporation, and how they translate to different levels of risk.
Sole Proprietor
A sole proprietorship is the simplest risk structure. If someone is a sole proprietor, often called a sole trader, they’re the sole owner of an unincorporated business. For most people, it’s the easiest business to start and one of the most common. It’s more common, in modern days, for people to start their own business venture without a business partner. For example, digital nomads and content creators are thriving in 2024 and are more often than not sole proprietors.
A sole proprietor can run their business using a personal bank account if they want to, and the personal and business income are typically the same. Despite that, the owner of a sole proprietorship would still need to register as a business and have the required licenses.
Risk: Because your business is tied to your name, it can be tricky to get business credit and loans. There’s so much more risk for lenders. And in terms of insurance, policies are often granted with unlimited personal liability against personal assets. The risk for the insurers isn’t necessarily high, but it is for the individual.
LLC
A limited liability corporation is the next step up.
An LLC is a type of business structure that gives limited liability (hence the name) protection to the owners of the company but comes with taxation benefits and management flexibility. While it is different from a sole proprietorship, it’s a sort of hybrid approach. The structure still combines features of a sole proprietorship, like flow-through taxation, with the risk pegged against 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 businesses can lose their LLC status and the benefits that come with it as quickly as they’re granted it if they cause misconduct, for example, with taxes. For insurance, there’s generally more risk attached to an LLC, and they’re required to obtain a general liability business insurance policy. That will cover everything from property damage, workplace accidents and workers comp insurance by Next Insurance, and so much more. It’s something sole proprietorships generally don’t seek coverage for.
Corporation
A corporation is the most complex structure of the three, and it comes with the most legal distance between the individual and the business. When someone forms a corporation, they create a separate legal entity. That entity owns the assets, signs the contracts, pays the taxes, and holds the liabilities. You can work for your business, but legally, you are not your business. All that equals more risk.
There are two common types of corporations in the U.S.: C-Corps and S-Corps. C-corps are taxed separately from the owners, while S-corps allow profits and losses to pass through to personal tax returns. That means you can choose how your business income is taxed based on what suits your growth plan.
Risk: A corporation offers the highest protection when it comes to personal liability. That’s why it’s the go-to for larger operations. However, that doesn’t mean the risk vanishes. It just shifts. Because of their scale and complexity, corporations face the greatest scrutiny from insurers.
The premiums are higher. The expectations are tougher. 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. That’s why coverage must be as layered as the structure itself.
How your business is structured changes everything, especially with risk. There’s no one-size-fits-all. It all comes down to what kind of risk you’re ready to own and what you want your insurance to catch.