Making the Switch: What Your Business Clients Need to Know When Changing Legal Entities

What Your Business Clients Need to Know When Changing Legal Entities
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BY:
Ana Sims

Workers’ Compensation Underwriting Director

August 10, 2020

It is not unusual for a business to experience situational changes in operations that result in a modification of its type of entity. Whether a business is going from sole proprietorship to a partnership, an LLC to a corporation, or any variation, the following changes can prompt an update of the type of legal entity:

  • Changes in Ownership. Structural changes in ownership can include when an owner leaves a company or when new partners are brought in.
  • Going Public. Adjustments to a business’s current structure are often made when it goes public.
  • Tax Purposes. A common example is when a business moves from a pass-through entity to another status and is required to pay taxes on the net income of the business.
  • Risk Mitigation. Businesses that are expanding operations may need to make changes in their type of legal entity for an additional layer of financial risk protection against potential lawsuits.

Take Note! As a broker, it’s important that you inform clients about the importance of reporting entity changes so you can present them with options to meet their business needs and ensure they are properly protected.

Changes in Workers’ Compensation Policies
When your clients change the ownership of their business (such as through a sale, transfer, merger, consolidation or formation of a new entity), these alterations often require changes to the Workers’ Compensation insurance policy. In some cases, minor updates to a business’s legal status may require only a simple policyholder request for a change in the named insured. However, for more substantial changes to the business structure (such as when changing from a sole proprietorship to a partnership or corporation), the law will require a business to notify federal, state, and local taxing and licensing authorities. This means the business will have to obtain an employer ID number and a whole new insurance policy will be issued.

Any changes to a business entity can affect its Workers’ Compensation experience modification factor, which is assigned by the National Council for Compensation Insurance (NCCI) and Workers’ Compensation Insurance Rating Bureau (WCIRB) in California. Today, businesses are required to report an entity change via a confidential request for information form (ERM-14, Online Ownership Form) or in a narrative on company letterhead signed by an officer.

Concerned that policyholders were failing to file updates of ownership in a timely manner, in 2019 the NCCI reporting rule was updated. Businesses now must make a written report of changes to their insurance carrier within 90 days. If the change in ownership results in a recalculation of the experience modification factor, the insurance carrier will apply the new mod retroactively to the date of the change in ownership — regardless of whether the revised mod is an increase or a decrease.

Take Note! The 2019 NCCI rule change also requires all policyholders to report ownership changes to their Workers’ Compensation provider — even if the policyholder is not experience-rated.

Conclusion
Entity changes need to be reported to the Workers’ Compensation insurance carrier. Changes in ownership provide you with an opportunity to assist your business owner clients in reassessing their risks to determine which policy will meet their needs on this new course. 

About Worldwide Facilities
As a five-star managing general agent, Worldwide Facilities has full underwriting authority to bind, issue, endorse, and renew policies on behalf of industry-leading carriers. With access to financially sound admitted markets as well as to excess and surplus lines, we offer a full spectrum of commercial and personal specialty lines.

To learn more, please contact Ana Sims, Workers’ Compensation Underwriting Director at RIC, a division of Worldwide Facilities. Ana can be reached at asims@wwfi.com or 707-535-2510.

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