Understand the importance of business insurance for LLCs.
Like many small business owners, if you operate a limited liability company (LLC), you may think that you are small or efficient enough so that you don’t need the protection and the extra cost of business insurance. But even an LLC can benefit from insurance—and not just for the coverage it provides in the event of misfortune.
A major reason that small business owners form LLCs is to protect their personal assets from the debts of the company, especially if the LLC runs into litigation. While an LLC can protect your personal assets in most, but not all, cases, your LLC will still have to cover all the legal costs related to a lawsuit. So, do LLCs need insurance?
Business insurance essentially takes the protection offered by an LLC a step further by protecting your business from the sudden costs that can arise related to litigation. The protection also extends beyond lawsuits.
Insurance Basics for LLCs
The primary form of insurance you should consider as a small LLC is general liability insurance, which protects your company from lawsuits. For example, it covers any legal claims made if a customer falls on your property and is injured, or if an employee damages customer property in the course of making a delivery.
If your LLC is sued, then general liability insurance will cover the costs related to the lawsuit, including settlement costs or the damages if the case goes against you. But just as important, general liability insurance will cover your legal fees if you win the case. Without general liability insurance, your business will have to cover all the expenses related to a case whether or not you win.
Some LLC owners worry that having insurance will encourage lawsuits. But the effect can be the opposite, as business owners with general liability insurance feel less financial pressure to settle frivolous litigation.
Like any form of insurance, general liability insurance is a form of protection. But it can also offer much more than that for an LLC. General liability insurance can often be a requirement to take on a contract with a larger company or to lease a property for your business. Since a business owner can be sued for acting illegally or from libel or slander, it often makes sense to have the general liability policy also cover the owners.
What Kind of Business Insurance Do You Need?
When you think of your LLC, you think of your employees, customers, products, facilities, public profile, and the new business your firm is seeking. While essential to your business, each of these elements also comes with some risk of litigation. There are special forms of insurance for each risk.
Business income insurance is an added layer of insurance that can compensate your LLC for any income you lose because of an unexpected event, such as a natural disaster.
Workers’ compensation insurance covers your LLC if one of your employees is injured while working for you. It covers their lost wages, as well as related medical costs, and can provide important legal protection for your business.
Commercial property insurance protects you in the event that any of your company equipment is damaged or stolen.
Cyber liability insurance is a relatively new form of coverage against data breaches and threats like malware. It will reimburse you for business costs related to a data breach or cyberattack and may be worth considering if your LLC relies on technology or handles large amounts of sensitive customer information.
Errors and omissions insurance is worth considering if your business offers advice to clients, like a financial advisor, consultant, or attorney. It protects you if your clients sue you over the advice you gave them.
What to Consider with Business Insurance
Choosing to insure your LLC comes with certain clear advantages. But it’s also an added expense. So there are a few things to consider before deciding what kinds of insurance your LLC really needs.
Think about where you operate, specifically the state where your LLC is registered. Some states have laws that make it difficult to sue a company. Delaware is one famous example. But in other states, you may face a higher risk of costly lawsuits. Your immediate legal landscape may help you make a smart decision about the level of coverage you need.
LLC owners should also consider the kind of business they operate. Some businesses tend to face more lawsuits than others. For instance, construction businesses tend to face more lawsuits because of the physical nature of their business and frequent disagreements with customers over the projects being built.
The Bottom Line
Insuring your LLC not only provides valuable protection but can also open your business to new customers and new opportunities.
Beyond general liability insurance, you may want to take on other protections. Like any small business owner, you spend much of your time planning for success, while preparing for the worst. Business insurance is one way to do both.