When you formed your business, you probably decided to make the entity a Limited Liability Corporation (LLC) to protect your personal assets. This type of entity will often do that, and it also offers other benefits such as avoiding double taxation of income, which you would be subject to if your company was a C-corporation. These are good reasons, but some people also think that if your business is an LLC, you don’t need business insurance. This is not true. Here are 3 reasons why your LLC needs business insurance.
1. You need to protect your business assets. In general, forming an LLC protects your personal assets from being attached to satisfy the obligations of the business. This means that, generally, you cannot lose your house if your business is sued. A little slip and fall is all it takes to put your business at risk. There are many circumstances, however, when the assets of your business could be in jeopardy. If you don’t have general liability insurance and someone slips and falls in your shop or office, the business may be liable for the costs associated with the injuries they sustain. This means that assets of the business, like cash, accounts receivable, equipment, materials, and so on, may have to be liquidated to pay for the person’s injuries.
If you or one of your employees makes a mistake or neglects to do something they should have done, and it causes harm to someone else, your business could be sued. Again, the assets of your business would be at risk.
2. Your personal assets could still be at risk. There are a number of circumstances under which you could be personally liable, even if your business is an LLC. If you don’t keep your business and personal assets completely separate, or if you personally guarantee a business loan, a lawsuit against your business could put personal assets at risk. If you do something illegal, even if you don’t know it’s illegal, your home or other possessions could be in jeopardy.
3. You’ll incur costs if you are sued, even if you are found not to be liable. You can get sued for almost anything, even if you haven’t made a mistake. A lawsuit means you’ll need a lawyer, may need to take time away from work to go to mediation or court, and could suffer damage to your reputation.
In order to fully protect your business and your personal assets, you need business insurance. General liability insurance protects your business against claims of bodily injury or property damage by a third person. Going far beyond the often-mentioned ‘slip-and-fall’ claims, you would also be protected against damage to a client’s property or even claims of slander of libel.
Professional liability protects you if you do something you shouldn’t have, or didn’t do something you should have. Sometimes called errors and omissions (E&O) coverage, professional liability insurance protects against claims that you caused harm or damage during the course of performing your work. It also protects you against mistakes made by your employees or by subcontractors whom you hire.
Here’s an example: Susan started an interior decorating business ten years ago. She formed it as an LLC, and assumed that was all she needed to do. She lived in an affluent community and was very talented, so her business grew quickly. She was able to take on several employees and was doing quite well for herself. One day, she was in the home of a very wealthy client and was measuring the windows for new drapes. She accidentally knocked over an antique vase, smashing it. The client insisted that Susan was responsible for replacing the vase, which was valued at over $100,000. Susan’s lawyer advised her that going to court could cost her even more, and she would be wise to pay for the vase to be replaced.
The cost for Susan to replace the vase wiped out all the money that her business had in the bank, and then some. She was forced to let her employees go, and she had to begin building her business once again from scratch. If Susan had had liability insurance, she could have been covered for the replacement cost of the vase. She could have kept her employees and her business would have continued on as though nothing had happened.
Forming an LLC is a good first step toward protecting yourself, your family and your business. In order to completely guard against a lawsuit or claim, however, be sure to have general and professional liability insurance as well.