A handshake symbolizing a change in the legal entity status of a business into a partnership

How Does Changing Your Legal Entity Status Affect Your Insurance?

Aug 10 2022

In today’s dynamic landscape, most businesses are not static. Businesses grow, change, and adapt over time. All major changes require you to update your insurance provider to ensure that you’re still covered accordingly. One of such changes that needs an insurance update is changing your business’s legal entity status. 

A business’s legal entity status can be a sole proprietorship, partnership, LLC (limited liability company), or corporation. Changing from one to another is considered a change in legal entity status. This impacts insurance, taxation, liabilities, and more. Often, such changes will also have concurrent or subsequent changes involving employee count, products/services offered, business strategy, owners, etc. 

This guide discusses how changing legal entity status affects your insurance and why an update is necessary. We’ll go over the following points: 

Close up on a business insurance document which is affected by a change in legal entity status

Common Reasons for Changing Legal Entity Status

1. For Decreasing Liability

Because of the ease of setting up a sole proprietorship, most businesses start this way. However, the sole proprietorship legal entity status is the riskiest in terms of liability. The sole owner would be personally liable for expenses, debts, etc. To limit liability, owners of sole proprietorships may change their legal entity status once the business is established.

2. For Tax Purposes

Sole proprietorships and partnerships are relatively easier to set up. However, once a business is more established, it could be time to take additional steps toward incorporating. With a corporation setup, the business owner/s are separate legal entities when it comes to taxes. Therefore, incorporating can also result in better tax rates.

3. To Protect the Business’s Name

Another reason a sole proprietorship would change its legal entity status into that of a corporation is to protect its business name. As an Ontario business gets more traction and a growing customer base, the name of the business needs to be protected by incorporating. This helps to avoid other businesses from consciously or unconsciously using the same name.

4. A Merger or Acquisition

When companies combine or if one company acquires another business, this would likely result in a change in legal entity status. 

Changing the Named Insured Based on Legal Entity Status

On commercial insurance policies, the Named Insured can be the business, organization, owners, and/or subsidiaries. An insurance policy can have multiple named insureds. Generally, the first named insured will be able to act on behalf of the other named insureds. 

Here is an example: If a business changes its legal entity status from a sole proprietorship to a partnership, this typically means that the business will have more than one owner. This would affect who the Named Insureds should be. 

Moreover, a business that merges with or acquires another company can change their legal entity status accordingly. A limited liability company, for example, can be merged with a corporation. This can affect who the owners are, the subsidiaries, and the business’s name as well. 

All of the above changes need to reflect on the business’s insurance policy to make sure that coverage remains valid. 

Papers for updating the Named Insured because of a change in legal entity status

Declaring Major Changes to Your Business

Changing a business’s legal entity status could be tied to major internal changes like mergers, acquisitions, growth, and so on.

So let’s explore how these changes can impact insurance: 

1. Increased Number of Employees

Hiring new employees and adding to/replacing key employees will require you to update your insurance. Major changes in the business’s workforce usually accompany changes like mergers, acquisitions, or business expansions. All of which are also closely linked to changing a business’s legal entity status. 

Though there are nuances, the general rule of thumb is that increasing your workforce will also increase risks which could result in higher premiums. 

2. Added Store Locations and Offices

Similar to a growing workforce, added store locations and offices are commonly seen in changes like mergers, acquisitions, and business expansions. 

Increased insurance premiums are typically linked to larger business premises, heavier foot traffic, and an increased number of sites. This could affect multiple types of commercial insurance, including CGL insurance, commercial property insurance, auto insurance, equipment insurance, etc. 

3. Changing Locations

When a change in legal entity status is linked to a change in (or added) owners and shareholders, there may be significant changes in the business’s strategy. This could mean switching to a more lucrative, cost-effective, or logistically-sound location. Similar to adding locations, changing locations will also impact multiple types of commercial insurance

4. Acquiring New Technologies and Equipment

If your change in legal entity status also results in strategic technological changes, this could impact multiple types of insurance. Acquiring new machinery and equipment will affect commercial property insurance and equipment insurance, respectively. 

5. Changes in Offered Products and Services

If your business has gone into a partnership/merger or has been acquired, your offered products and services may change. Such a change will impact what risks you have regarding general liability. Furthermore, depending on your offered products and services, additional types of insurance may be recommended to fully protect youIf you want fewer insurance worries and more time to focus on your business, we can help your business.

Get Personalized Business Insurance & Dedicated Ongoing Assistance

This wraps up our article on how changing legal entity status impacts your insurance and why an insurance update will be necessary. In many cases, business owners may feel quite alone as they deal with various nuances in insurance. 

KASE Insurance is an award-winning insurance brokerage firm in Ontario that specializes in two things: customized business insurance and dedicated ongoing assistance. We are with you in every step — from negotiating premiums to following up on claims to updating your insurance plans. 

If you have further questions about insurance and legal entity status changes, contact our team today!

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