3 Reasons your LLC needs small business insurance
When you formed your business, you may have 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 is 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. A little slip and fall is all it takes to put your business at risk.
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 the obligations of the business. This means that, generally, you cannot lose your house if your business is sued.
There are many circumstances, however, when the assets of your business could be in jeopardy. For instance, 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, and it causes harm to someone else, your business could be sued. Again, the assets of your business may 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 your 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 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 party. Going far beyond the often-mentioned ‘slip-and-fall’ claims, you may also be protected against claims of slander or libel.
Professional Liability Insurance for LLCs
Professional liability insurance may protect you if you did something you shouldn’t have, or didn’t do something you should have in the performance of your professional services. Sometimes called errors and omissions (E&O) coverage, professional liability insurance generally protects against claims that you caused harm or damage during the course of performing your professional services. It may also protect you against mistakes made by your employees.
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.
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 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.
Set your LLC up for success with business insurance
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, make sure you have general and professional liability insurance as well. Learn more about small business insurance and how it can help you protect everything you have worked hard to build.