Legal aspects such as taxation and insurance are integral part of any business setup. Whether you are starting an online business or got a real-world business venture, you need to comply with the legal obligations mandated for businesses in the country of operation.
When you’re starting a business, you’ll need to consider hundreds of different investments and structural options. The choices can be overwhelming, so most entrepreneurs try to stay as lean as possible, choosing only what they need to ensure they aren’t spending too much or overloading their businesses with unnecessary accouterments. At the same time, you don’t want to skimp on anything you’re legally required to have.
If you are based in the US, one of the legal requirements for running a business is insurance. Based on the nature of work and industry, you need to get insurance for your workers and business infrastructure.
So what types of business insurance are truly “necessary” and which ones can you get away without?
Types of Business Insurance
These are some of the main types of business insurance, some of which are necessary, some of which are not, and some of which are in a gray area:
- Workers’ compensation. The rules on workers’ compensation vary from state to state, but for the most part, workers’ compensation insurance is a mandatory insurance for businesses employing more than one individual. Workers’ compensation protects your employees in the event of an onsite incident, regardless of who is at fault. If your employees make a workers’ compensation claim, they won’t be able to file a personal injury lawsuit against you. Plus, they’ll receive medical benefits, one of several types of disability benefits, and/or death benefits. It’s important to have for both your sakes, in addition to being a standard legal requirement.
- Unemployment insurance. The federal government also requires businesses to have unemployment insurance. In most cases, employers pay a kind of tax on wages paid to their employees, withholding that amount from employee paychecks. Then, when an employee is laid off, or when they quit without a reasonable cause, they will be entitled to collect unemployment benefits, up to a few hundred dollars a week. Employees who are fired or who quit without reasonable cause may not be eligible. Note that requirements vary by state.
- Disability insurance. In the final type of insurance required by the federal government, disability income insurance is designed to ensure your employees have a temporary source of income in the event that they are partially or fully disabled (and unable to work). Different states have different requirements, covering different types of disability and projected duration, so make sure you do your research here.
- Liability insurance. There are actually multiple types of liability insurance. These include general liability insurance, which will provide an umbrella of coverage to protect your business against personal injury claims, property damage, libel, slander, and other settlements related to your business. Product liability insurance is similar but specifically protects you against claims related to the products you’re selling and distributing. Professional liability insurance will protect you and your staff from negligence claims, and other malpractice and errors. In most states, liability insurance is not a legal requirement, but it’s a good idea to have just in case.
- Property insurance. If you own your office building, or the location where you do business, you should also consider having a policy that protects it from damage or destruction. This is likely one of your most significant business investments, so it pays to have a policy that protects it from total or significant loss. Depending on your state and the conditions of your purchase, you may be required to buy property insurance, but the federal government does not mandate or regulate this type of insurance.
- Vehicle insurance. If your business is going to own a vehicle, you’ll need to follow the standard requirements for registering and insuring that vehicle. Company cars aren’t exempt from the requirement of vehicle insurance (though it’s not common for startup entrepreneurs to make a company car their first investment).
- Business interruption insurance. Though not typically required by either federal or state governments, business interruption insurance could be a sound investment. This insurance policy is designed to secure you a line of revenue and/or personal income in the event that your business operations are unexpectedly interrupted by things like injury, natural disaster, or other developments.
Choosing the Best Policy
The requirements for insurance can be complex, but there aren’t many types of insurance that are formally required by law. Make sure you consult the laws in your state, working either with a lawyer or an insurance professional, to ensure you remain in full compliance, and get quotes from multiple companies before you settle on a policy. The goal is to balance your expenses with the amount of protection you can get, without sacrificing anything you truly need.