If you’re starting or growing your business, forming a Limited Liability Company (LLC) is a great choice. The structure of an LLC makes managing your business simple and inexpensive, plus it can reduce your personal liability. But it’s also important to understand that on its own, an LLC does not limit your business liability.
If you want extra protection for both your personal and business liability, you may want to purchase liability insurance for your LLC. Here we’ll dig into the details of liability, tell you what your LLC provides and let you know why you should purchase liability insurance.
How Your LLC Limits Your Personal Liability
An LLC is called a “Limited Liability Company” because it limits the liabilities of the owners and managers of the business. This protects personal assets from being at risk if your business is found liable. For the sake of simplicity, let’s call this “liability protection.” Liability protection works by separating your personal assets from your business assets when you form an LLC — that’s why it is so important to have a separate bank account, distinct bookkeeping and other clear separations between personal and business transactions.
Here’s how liability protection functions. For example, if your business is sued by an unhappy customer and damages are awarded, the court couldn’t force you to use your personal assets (e.g., your savings or your home) to pay those damages. It might force your business into bankruptcy, but your personal property, money and other assets would be protected.
Note that in some cases, the LLC owner or manager may have their personal assets made liable through a legal action known as “piercing the corporate veil.” This can occur if you aren’t careful about actually maintaining the legal separation between your personal and business assets — e.g., mixing assets, bank transactions, and accounts. If you’re concerned about this and want to protect your assets further, we recommend speaking to your attorney or purchasing liability insurance.
What Liability Insurance Does for You and Your LLC
While liability protection (discussed above) protects your personal assets, liability insurance protects the assets of your business. You can buy liability insurance from a provider like Cover Wallet to cover your business assets (including business cash, property, and vehicles owned, equipment, technology and more) from lawsuits and other claims.
How Liability Insurance and Liability Protection Work Together
Together, your LLC’s liability protection and any liability insurance you purchase provide one key benefit: reducing the financial losses to you or your business as the result of a lawsuit against your LLC. Some liability insurance policies can also protect you in other ways, like compensating you if your business is impacted by a natural disaster. Protection does vary among providers and policies, so make sure to pay attention if you’re seeking a specific type of coverage.
Different Types of Liability Insurance
There are several types of liability insurance available to your LLC. Here are some of the more common ones:
- General liability: Also known as an “umbrella” policy, general liability insurance typically protects against common issues like personal injury, property damage, and financial loss.
- Professional liability: This type of insurance covers businesses that provide professional services, and it insures against areas like malpractice or bad advice that causes financial or other harm.
- Product liability: This type of insurance covers issues caused by products like injury or property damage; it is popular with manufacturers and retailers.
Possible Issues With Business Liability Insurance
Whatever policy you decide to purchase, make sure you understand any potential drawbacks before committing. Here’s what to look out for:
- Policy exclusions: Check exactly what your policy does and does not cover. Some high-risk areas may be excluded from coverage, so it’s vital to identify and resolve any gaps.
- Lead times: Claims can take months or years to finalize, and some policies will not cover you if the claim event started before the policy came into effect.
- Policy limits: Liability insurance policies often limit the amount they will pay out, both for individual incidents and in aggregate over a period of time. Make sure you have enough coverage to pay for any possible damages or other issues since your business will be responsible for any shortfall.
For a high level of protection, we recommend utilizing your LLC’s built-in liability protection as you start your company, along with purchasing a comprehensive business liability insurance policy. Incfile is here to help get your LLC off the ground, and we recommend checking out Cover Wallet if you’re looking for the best liability insurance prices and policies.
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