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LLC Insurance: What Is Business Insurance for an LLC?

There’s no two ways about it: Any time you launch your own business, you inevitably court risk. It could be a claim of intellectual property violation, allegations that your product or service has caused harm, even accusations of false advertising. Regardless, the threat of a lawsuit is very real, no matter what industry or vertical you inhabit.

llc insurance

Thankfully, there are a number of effective ways in which businesses can mitigate risk. One such option is establishing a Limited Liability Company, or LLC. This legal structure comes with some important built-in protections, effectively letting you keep your personal assets safe and secure from any business litigation.
Registering as an LLC is an important first step, but it’s not the only way to mediate risk. Equally important is acquiring the right business insurance. The question is, what type of insurance is best-suited for mediating LLC risk?

LLCs at a Glance

Before we get into the specifics of insurance, it might be helpful to review some LLC basics.

What is an LLC?

An LLC is a business structure that allows you to establish a separate legal entity. Unlike Sole Proprietorships, LLCs allow you to clearly distinguish the business from its owner, and to maintain a line of separation between business assets/liabilities and personal assets/liabilities.

What are the Benefits of an LLC?

There are a number of LLC benefits, ranging from tax flexibility to enhanced credibility. On the topic of risk, the important thing to note is that an LLC offers you personal wealth protection, making it possible to shield personal assets from creditors and litigation.

How to Register an LLC

The steps to register an LLC can vary by state, but generally go like this:

  1. Choose a name for your LLC, which needs to be something not already in use by an LLC in your state.
  2. Choose a person or individual to serve as your Registered Agent. (Common question: Should I be my own registered agent for an LLC? While it’s legal to do so in some states, hiring a third-party service is usually the best option.)
  3. Create an Operating Agreement, which functions as a charter for your business and can help protect you from legal disputes down the road.
  4. File Articles of Organization with your state, officially establishing your LLC. This will also require you to pay your state’s filing fee.
  5. Claim an Employer Identification Number (EIN) from the IRS, and set up a business bank account that is distinct from your personal banking.

This basic process, which may take two to four weeks to complete, should establish your business as an LLC, providing immediate personal wealth protections. However, it’s still important to pursue insurance coverage, which can help you to further mitigate business risk.

What Type of Insurance Do You Need for Your LLC?

When it comes to choosing the right insurance coverage, different businesses will have different needs. It’s always best to talk with an independent broker or with a business attorney, who can provide a more specific recommendation to address your specific risks.

With that said, LLCS almost always benefit from having both professional liability coverage and general liability coverage in place.

Professional Liability Coverage

When you run a small business, you obviously want to do everything in your power to keep your customers and clients happy. Mistakes can happen even to the best professionals, which is exactly why entrepreneurs need professional liability coverage.

Simply put, this insurance can protect you and your LLC should a customer ever sue you, claiming that you made some kind of a mistake in the professional services you offered. As an example, say you have a financial services company, and you make a simple clerical error that ends up costing your client a lot of money. Professional liability coverage can help cover any legal fees or penalties you incur as a result of that error.

Note: As you shop for insurance, be aware that professional liability is often known as errors and omissions coverage, or E&O insurance.

General Liability Coverage

Your LLC will likely need general liability coverage, as well. General liability coverage, also called business liability insurance, can protect your business from claims that someone sustained a bodily injury or property damage due to the actions (or negligence) of your business.

A common example: If someone trips on a loose stair heading toward the front door of your business, and they fall and break their wrist, general liability coverage can help you defray any legal claims brought against you.

Other Types of Insurance for Your LLC

These are the two most common examples of LLC insurance, but there are a few additional types of coverage that your business may or may not need. Some examples include:

  • Worker’s compensation insurance, which can help you and your employees weather the cost of workplace accidents and injuries. Most states will require this insurance if you have employees on your payroll.
  • Commercial auto insurance, which you’ll need to protect a company car or a fleet of vehicles.
  • Commercial property insurance, which may be needed to help protect your physical assets or storefront.

These are just a few examples of how insurance coverage can mitigate risk at your LLC. Again, an independent broker or attorney can talk more about the specifics.

For Small Businesses, Risk Management is a Top Priority

Every new business faces considerable risk. Thankfully, there is much you can do to keep that risk controlled. Registering as an LLC, then investing in the right LLC insurance, are great first steps.

Author Bio

Amanda E. Clark  is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing, along with small business management.

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