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Old 02-09-2010, 11:28 AM
posterlion posterlion is offline
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Insurance vs Self-Insurance

I've been thinking about this for a while and would like to hear some thoughtful ideas on this topic.

I've always believed that the best insurance is self-insurance, except where required by law. I can get $300K coverage for $250 a year and $1M coverage for $329 a year. I know that is very cheap compared to a lot of you guys. My location is more or less in hill-billy-land so things are cheap here.

That said, ten years of $1mil coverage would be $3,290 with no premium increases. It just makes me wonder if the average insurance claim would be more than that and if I'd need to file a claim more than once every ten years.

Here is some food for thought or questions I have for the board:

1)When has insurance ever really SAVED someone's butt? I'd like to hear a real life story on that one.

2)What is the average number of insurance claims filed for the typical LCO?

3)If I am an LLC or a corporate LCO, how much could I really be sued for?

4)And if I was sued for more than the value of the company, couldn't I just file bankruptcy and turn around and start another LLC and continue with business as usual?

5)How can I limit the value of my company and thus reduce my exposure?

6)Couldn't I have an LLC or Corporation separate from my LCO that holds my assets? How about ACME Rentals for my equipment.

7)My LCO would simply rent all its equipment from ACME. Then my LCO would not own any equipment and the equipment could not be included in a lawsuit.

I know this is me trying to be very cutesy, but it is a legitimate cutesy thought.

Any ideas on this?

Thanks in advance!
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  #2  
Old 02-09-2010, 12:25 PM
MarcSmith MarcSmith is offline
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1)When has insurance ever really SAVED someone's butt? I'd like to hear a real life story on that one. I worked for TGLC they are self insured. one of their managers had 80yds of mulch dropped along side a road near an industrial complex they worked. no cones or signs. car drifts off the road hits the the pile and rolls over. driver is hospitalized....


2)What is the average number of insurance claims filed for the typical LCO? Four years in business for my self 3 crews I never had one claim...

3)If I am an LLC or a corporate LCO, how much could I really be sued for? lawyers will sue all who have pockets. the corp will be sues the LLC will be sues, as the owner you'd sued, if you were running the equipment you'd be sued. The equipment manufactures would be sued...

4)And if I was sued for more than the value of the company, couldn't I just file bankruptcy and turn around and start another LLC and continue with business as usual? I guess if you want to weasel out of your obligations Sure...

5)How can I limit the value of my company and thus reduce my exposure?

6)Couldn't I have an LLC or Corporation separate from my LCO that holds my assets? How about ACME Rentals for my equipment. More paper work, come tax time, more $$$ biz lic, and tax prep, more headaches.

7)My LCO would simply rent all its equipment from ACME. Then my LCO would not own any equipment and the equipment could not be included in a lawsuit. Any smart lawyer can find out what stuff you own. and if you own one company thats supporting another company, chances are they could still sue.


Remember you can be sued at any time for any thing. for any amount. Let say I decide to sue you for 5 million bucks. lets say you only have 500K in assets/capital , ect...you still would still need court representation $$$$ you'd be losing time off work......

remember enron....who got sued....The complaint, which is on behalf of more than 400 staff, names ex-chief executives Kenneth Lay and Jeffrey Skilling, ex-finance director Andrew Fastow, auditors Andersen and trustee firm Northern Trust as defendants.

Here the other question... Why put all your assets(livelyhood) in that type of situation. all so you can save the value of one string trimmer each year...

Insurance-better to have and not need, than need and not have....
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  #3  
Old 02-09-2010, 12:43 PM
posterlion posterlion is offline
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Well said and thanks for your response! I'm thinking the $329 for insurance is a good idea so far. I don't want to shirk any responsibility. I know my initial post sounds that way. My motive for the post is just for ideas.

That said, what do you think about using the LLC/Corp idea to keep you from paying SSI and Unemployment? You could set up a master LLC for LCO MGMT and a separate LLC for each crew.

Say you have three crews. You'd have LLC MGMT, LLC Crew A, LLC Crew B, and LLC Crew C. You'd be a member of all four LLC's. Your roll in the crew LLC"s would be something like "Marketing Director" and your Member Agreement would just be your Owner's markup.

I realize there is no way for you to get around your SSI for being self employed, but you would not need to pay the crews' SSI.

Last edited by posterlion; 02-09-2010 at 12:51 PM.
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Old 02-09-2010, 02:26 PM
Scagmower48 Scagmower48 is offline
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I carry a $1 million in liability like most guys in here. I only carry it for the big things, such as throwing a rock at somebody with my mower. If I dent a car or break a window I won't make a claim. I would just pay out of pocket to avoid significant insurance increases.

I wish I could get a 5-10K deductable for my liability insurance, that would cause the premium to go down for sure.
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  #5  
Old 02-09-2010, 03:39 PM
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Total Grounds Maintenance Total Grounds Maintenance is offline
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IMO it is better to spend the extra 300 and get total coverage. I just upped my policy from $750 to a $2900 commercial premium. I wanted the extra 2 mil coverage and all the other stuff that goes along with a better policy.
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  #6  
Old 02-09-2010, 06:40 PM
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BearWise Landscapers BearWise Landscapers is offline
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For proper self-insurance, you need to have cash available to pay those claims. This is not very practical for smaller businesses. When your landscaping business reaches 50 to 100 employees, we recommend that you start consider higher deductible programs and work your way towards a self-insurance model. Not even Walt Disney World has a true self-insurance program and they use high retention levels like a typical reinsurance or umbrella liability policy.

I recommend that you check out this article about the purpose of insurance and maybe this article about types of insurance for landscapers.

I'll try to get some actual statistics for you on claims data.
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  #7  
Old 02-09-2010, 06:58 PM
MarcSmith MarcSmith is offline
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Quote:
Originally Posted by posterlion View Post
That said, what do you think about using the LLC/Corp idea to keep you from paying SSI and Unemployment? You could set up a master LLC for LCO MGMT and a separate LLC for each crew.

Say you have three crews. You'd have LLC MGMT, LLC Crew A, LLC Crew B, and LLC Crew C. You'd be a member of all four LLC's. Your roll in the crew LLC"s would be something like "Marketing Director" and your Member Agreement would just be your Owner's markup.
OK but then each crew is a company and it has multiple employee's so you'd still be on the hook for the employees of each crew, unless you have each person up as an LLC... paper work, ,headache nightmare...and all one of the guys has to do is complain that he feels he being asked to do something shady and tot he IRS since you jacked him on a couple hours of pay you've got fed crawling up your butt. again, so you don't have to pay your fair share. so yes to be rude it sounds like you are trying to shirk your responsibility by not paying into SSI and unemployment...

Again if you get audited, the auditor is gonna see this and think "hey this guys trying to pull one over on us...lets dig a bit deeper...next thing you know the agent is going back 7 years.....talking to all of your "LLC's"

how much will you save? is it worth the paperwork nightmare...And then you still need to go back and see that the IRS will still classify them as an EMPLOYEE not an LLC subcontractor. YOU are providing equipment, YOU are directing them, YOU are disciplining them,



Being honest is easy...you don t have to remember what story you told to which person...
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  #8  
Old 02-10-2010, 02:09 AM
posterlion posterlion is offline
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Quote:
Originally Posted by MarcSmith View Post
so yes to be rude it sounds like you are trying to shirk your responsibility by not paying into SSI and unemployment...

Being honest is easy...you don't have to remember what story you told to which person...
I agree there would be extra paper work, but I don't agree that I would be trying to shirk responsibility because the SSI is going to get paid and the Social Security guys will be happy.

Every member of an LLC is self-employed by definition and therefore responsible for their own SSI. The only way there would be any employees is if you had someone on a crew that did not sign the agreement.

The member's agreement specifies who owns what, including the percentage ownership of each member. If it is my equipment then it is my equipment and there is no problem. I can't see any reason the Feds would care.

On a different note, each of your crews might have more incentive to perform knowing they belonged to something more than just a paycheck from the boss. Maybe it is a joke to consider these kinds of incentives with an LCO, but as I said in the beginning, I am just exploring this stuff.

Being honest is easy with an LLC because the member's agreement is written in black and white and signed by all parties. You can go check the agreement at any time if you have memory problems.
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  #9  
Old 02-10-2010, 08:59 AM
MarcSmith MarcSmith is offline
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as a business owner with employees it is YOUR responsibility to pay what is due on your employees Making them a subcontractor or an LLC you are trying to shift that responsibility to your employees.

this is from an IRS publication...

++++++++++++++
1. Is there a difference between an employee and a subcontractor?
If a worker is an employee you are responsible for withholding and paying the employment-related taxes. If your
worker is a subcontractor, he is responsible for keeping his or her own records and paying his or her own income
and self-employment taxes. Therefore, it is very important to determine whether your worker is an employee or a
subcontractor.
2. If the worker is a subcontractor, what forms do I complete and file to report his earnings?
You use Form 1099-MISC, Miscellaneous Income for payments of $600 or more to your subcontractors.
3. How do I determine whether my worker is an employee or subcontractor?
The courts have considered many factors in deciding whether a worker is a subcontractor or an employee.
They
can be divided into three categories:
∑ Behavioral control evaluates whether you have the right to direct and control how the work is done (training
and instructions),
∑ Financial control considers whether you have the right to direct and control the economic aspects of the
work (significant investment, expenses, opportunity for profit or loss), and
∑ Relationship of the parties looks at how you and the worker view your relationship (employee benefits and
written contracts).
All facts and circumstances of your situation must be examined to determine whether a worker is an employee or
subcontractor. No single factor provides the answer.
4. How do instructions and training affect the employment status of a worker?
Instructions and training provided to a worker are important factors to be considered. If you give the worker
detailed instructions on how work is to be done or train the worker to perform tasks in a certain way, the worker
may be an employee. A subcontractor does not need or receive detailed instructions or training on how the work
should be don
5. What types of instructions might be given to a worker who is an employee?
Examples of instructions can cover a wide range of topics, for example:
∑ how, when or where to do the work,
∑ what tools or equipment to use,
∑ what assistants to hire to help with the work, and
∑ where to purchase materials and services.
6. Does my workerís status change if he provides his own tools or hires his own workers?
Yes, a subcontractor generally provides his own tools and materials and can hire employees or subcontractors
himself.
See Example
7. If my worker invests in his own equipment does it change his status?
Yes, if the worker owns or rents costly equipment to do the work, he may be a subcontractor.
8. If I reimburse my worker for his job related out of pocket expenses, does it affect his status?
Yes, a worker that has high, non-reimbursed expenses on a regular basis may be a subcontractor.
See Example.
9. If I provide employee benefits to my workers, does it affect their status?
If you provide benefits such as paid vacation, sick days, health insurance, or a pension, the worker may be an
employee. However, many workers who are employees do not receive employee benefits. Consequently, the
absence of employee benefits may not be important in deciding the workerís status.
10. If the written contract with my worker states he is a subcontractor, will this outweigh the other factors?
While a contractual designation, in and of itself, is not sufficient evidence for determining worker status, a written
contract describing the worker as a subcontractor may be viewed as evidence that you and the worker intended the
relationship to be independent. If the parties are not acting in accordance with the terms of the contract, however,the contract may be ignored. The actual facts in each situation are more important than a contract, but the contract
may be a deciding factor, all other things being equal.
11. Will the IRS help me determine my workerís status?
If you want to get an IRS opinion on your situation, a Form SS-8 can be filled out by either the employer or the
worker and sent to your local Internal Revenue Service office for a decision.
12. What happens if there is an employment tax audit?
Many IRS audits of employment tax issues end with all parties reaching a mutual decision. If, however, it appears
that your workers should be classified as employees, the first step the auditor will take is to see if the relief
provisions (under section 530 of the Revenue Act of 1978) will limit your liability for the employment tax.
If the requirements of Section 530 are met, you may be entitled to relief from federal employment tax obligations.
Section 530 terminates the businessís but not the workerís employment tax liability, including any interest or
penalties attributable to the liability for employment taxes. Under Section 530 there are two tests that must be met:
∑ Consistency Test
∑ Reasonable Basis Test
To meet the consistency test, you must:
∑ File all required Forms 1099 with the IRS on time, reporting the amounts paid to the workers, and
∑ Have treated all workers in similar jobs in the same manner as the workers in question. That is, if you pay two
of your painters as employees and four as subcontractors, you won't meet this test.
To meet the reasonable basis test, you must have treated the worker as a subcontractor because you reasonably
relied on:
∑ A court case or ruling to support your position,
∑ A prior IRS audit,
∑ A long standing practice in your industry, or
∑ Any other reasonable basis for treating worker as subcontractor
If an IRS audit finds that your workers are employees but you meet the consistency and reasonable basis tests, you will not have to pay employment taxes on the workers. The workers, however, remain liable for paying their share of the FICA tax on the wages received.
+++++++++++++++++++


On a different note, each of your crews might have more incentive to perform knowing they belonged to something more than just a paycheck from the boss. what incentive. they don't own the equipment they don't the customer list. you are still doing the billing and selling. They are getting a paycheck from you... and then they have to go through the problems of quartely estimated tax payments, SSI, unemployment.... some incentive...

The member's agreement specifies who owns what, including the percentage ownership of each member. If it is my equipment then it is my equipment and there is no problem. I can't see any reason the Feds would care. equipment ownership is one factor in determining employee/subcontractor relationship
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  #10  
Old 02-10-2010, 12:52 PM
posterlion posterlion is offline
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re: MarcSmith

Hey Marc,

I really appreciate you spending the time and effort to produce that information for this board. It sheds a lot of light on the subject I've been thinking about, that is for sure.

I am pretty sure it's obvious that I've no experience managing crews. That is why I am asking all these kindergarten type questions.

Thanks again for your effort, alot!
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