IF If I have business insurance, I do not need to incorporate (and other scary myths).
If you are trying to decide whether you need to incorporate or just need to purchase insurance, the answer is you are asking the wrong question.
Incorporating your business and getting business liability insurance are not interchangeable, as both are necessary.
Let’s pretend I am a clever lawyer for a second. If my client goes after your business and you are either only incorporated or just have business insurance, it will be pretty easy for me to exploit those gaping holes left in your business protection.
So, let’s look at the two scenarios. One where you are incorporated, and do not have insurance, and one where you have insurance, but are not incorporated.
1. I am incorporated, so why do I need insurance?
While incorporating gives to a shield of liability protection, this shield is not something you can hold up against your potential plaintiff and be done with. You will still need to go to court and defend your business. That is the kicker. If you are covered by business insurance, the first thing you will do if someone comes after you is contact your insurance carrier. Then your insurance company will assign you a preapproved lawyer that they will pay for. This way, you don’t have to spend thousands and thousands defending yourself, even if you are in the right.
Tip: It is advisable, if possible, to contact your insurance company before a lawsuit ensues. That is, at the first sign of possible conflict (an angry client, a demand letter, an email demanding money), let your insurance company know that there may be an issue.
2. I have business insurance, so why do I need to incorporate?
Well obviously, so you can keep ME n business! Okay just kidding. I realize you are probably not laughing.
I love my colleagues out there in the insurance business, but let’s admit, insurance companies are not always jumping to the front of the line to pay your claim. The most egregious situations stem from when the company simply does not deliver on the policies that they provide (that is when you look to Massachusetts Unfair or Deceptive Trade Practices Law as it pertains to the insurance industry [but then you will have to pay for an attorney to bring your claim]). More common issues arise from policy limits and exclusions. If any of the situations above arise, you will be paying money. If you are not incorporated, that money comes from your personal assets. If you formed an entity from the outset of your business, you will have separated your business assets from your personal assets and will pay only from the business.
Tip: no matter how much you read on the internet, do not determine what entity is best for you without consulting both a CPA and a business attorney. You can avoid a lot of headache and unnecessary expenditures in the future if you consult with those two professionals first. Usually those consultations are a low flat fee or cost you nothing at all!