Entrepreneurship, Second Edition

12.7. Insurance

The expenses associated with beginning a business are not inconsiderable. As employees are added to the organization, Social Security, unemployment compensation, and other costs increase, and workers' compensation insurance is required by many states. But such insurance is not the only insurance that it may be advisable to obtain.

12.7.1. Property Insurance

To begin with, Dave and Deborah should consider property insurance for any equipment or inventory that they may have on hand. In fact, should they ever obtain a loan for their business, the lender will likely take inventory and equipment as collateral and insist that it be insured (with the proceeds payable to the lender).

12.7.2. Liability Insurance

Deborah and Dave should also consider purchasing liability insurance to cover claims against their business for product liability and other possible tort claims. And although the corporate veil protects Deborah's and Dave's personal assets against claims of undercapitalization, they no doubt hope that someday soon their business will have its own considerable net worth to protect. Automobile liability insurance is required by many states as a condition to register a car, and we have already discussed the dangers of tort liability caused by employees.

12.7.3. Key Person Life Insurance

We've discussed life insurance to cover stock redemptions under cross-purchase or redemption agreements. But also consider what would occur upon Dave's untimely death. Not only may ...