Do You Need Business Insurance If You Incorporate?
Incorporating your business means putting your personal assets at less risk, but should you also remain insured?
After years of pouring your own blood, sweat, and tears into your business, it’s a big step to go from a sole proprietor or limited liability business to incorporating your company.That said, one of the major advantages of incorporating your business is that your personal assets become protected from potentially taking on any debts or liabilities that the company accrues. With this reduction of responsibility, however, you may be wondering if you still need business insurance.
In this post, we’ll take a look at whether or not you should remain insured after incorporation by answering some of the most frequently asked questions on this topic.
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The Top 3 FAQs About Incorporation and Business Insurance
Do I have to incorporate my business?
As a business owner, you’re never obligated or required to incorporate your business. However, there are a number of benefits to doing so, such as:
Division of personal and professional: The separation of your personal bank account from the assets of the company means you can pay yourself a personal income out of the company — great for allowing you to decide what your income tax rate will be. This can also help protect your assets from creditors and lawsuits, should the need arise.
Multiple tax benefits: There are several income tax benefits that can come from incorporation as well, such as spreading out any tax losses, and taking advantage of deductions on business expenses.
Do I still need business insurance after incorporation?
While both incorporation and business insurance reduce your risk of liability, there are certain unique qualities that each offer. Business insurance bundles plenty of valuable policies together that offer protection that incorporation doesn’t.
For instance, should your business suffer a fire, flood, or other natural disaster, having business insurance can help cover the cost of replacing any of your assets and equipment.
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In the event of any lawsuit that’s brought up against your company, having business insurance can protect your corporation from having to pay any legal fees associated with the trial. Even if you’ve done nothing wrong, you may be charged with fees or penalties if things don’t go your way. Without a proper corporation liability insurance policy in place, your business may be required to pay these fees.
Also, clients may require proof of insurance before they hire you for your professional services. Depending on your industry, customers may be protected under your policy should anything go wrong.
Related: The importance of business insurance
What does business insurance cover?
Business insurance often comes with a number of important policies, such as:
Professional liability insurance: Also called errors and omissions (E&O) insurance, business liability insurance, and commercial general liability insurance, professional liability insurance covers any injuries or property damage. It can protect you and your business from any claims of negligence that are brought against you.
Directors and officers insurance: This important policy protects the directors and officers of your organization from any potential lawsuits accusing them of any wrongful performance of duties.
Business interruption insurance: This policy can help pay for lost income for you and your employees in the event of a peril that’s covered by your policy. A common example of this is a retail store that suffers an unfortunate fire and has to close while repairs are being done.
Contents insurance: In the case of a flood, fire, or other insured event, having a proper contents insurance policy in place will ensure that you don’t have to replace any possessions pertaining to your business that may have been damaged.
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Other Common FAQs About Business Insurance
Q: Is business insurance mandatory in Canada?
A: While business insurance isn’t a legal requirement in Canada, it’s definitely recommended. Without it, any small accident or customer complaint can end in huge financial penalties, from paying for damages to court fees — even if you’re not at fault.
Related: When is insurance mandatory
Q: Does my business need to be incorporated?
A: Not necessarily. Every business is different, so be sure to talk to a lawyer or accountant to discuss whether the many fees associated with incorporating your business is worth it.
Have more questions about covering your business with insurance? Start your online application now and get a quote emailed right to your inbox within minutes.
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Originally published August 26, 2022, updated August 25, 2023
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