Can Changing Your Legal Entity Status Affect Your Insurance?
Changing the legal entity type of your business can affect your insurance, but changes affect different lines differently. For most kinds of insurance, carriers will usually change the “named insured” based on a request from the customer, provided there are no material changes in the scope of the operation. If there are changes in the operation, such as change in management, ownership, or strategic direction, then a new policy is usually underwritten and rewritten.
Workers Compensation is one kind of insurance greatly affected, however. A change from proprietorship to corporation, or corporation to LLC, will result in material changes to this particular insurance line as the premium charged is a direct function of payroll. In particular, owners’ payroll is fixed statutorily and differs for proprietorship, corporations, LLC's and partnerships.
Because the payroll amount of compensation in a corporation can be managed through distributions, deductions to qualified plans and other accounting practices, Workers Compensation assigns a minimum payroll of $10,920 and maximum of $55,120 annually for officers (with >25% ownership). Thus a corporate officer taking no payroll (and living only on distributions) will still be charged as though his or her payroll was $10,400. Conversely, a corporate officer making $500,000 a year is capped at $52,000. Although included officers are automatically subject to this payroll floor and ceiling, owners with 25% or greater ownership may opt out.
Proprietorship is different. Unlike corporations where corporate officers are included by default, proprietorship excludes owners by default. As with the option of corporate officer opt-out, proprietors may opt in. When this is the case, their payroll is statutorily set at $47,000 (as of October 2017 and subject to change). Partners in partnerships and members in LLC's are treated the same as proprietors for Workers Compensation purposes; they are excluded by default but may opt in.
Why opt in? The most important reason is you’re covered! If you get hurt at work the policy will pay medical expenses and lost wages. Why opt out? To keep workers compensation costs low.
Some contractors will require that their subcontractors include owners on their workers comp insurance policy. The purpose of this is to prevent payments to these contractors from being charged to the general contractor’s payroll. To make the distinction clear, Certificates of workers compensation insurance usually state in the comments section whether owners are included or excluded.
Businesses are dynamic and changes to corporate structure are one of many changes that businesses experience. If you are contemplating a change in business entity structure, have your attorney and your insurance agent or risk partner collaborate on how this might affect your risk and insurance program. To discuss your situation, call one of the professionals at Gordon Atlantic Insurance toll free at 800-649-3252. Prefer to type instead of talk? Submit your question below.