I received a question from a reader the other day in regards to whether small business insurance is necessary for a business even if one is protected by limited liability via an LLC or corporation.
Specifically, he wanted to know whether it was worth paying for insurance for a pass through entity like an LLC or S Corp which carries no profits within the business.
Whenever someone asks me this question, I always say yes no matter the nature of the business but it largely depends on your risk tolerance.
Especially if you are running a business in the United States, the chances of getting sued are higher than you think and it really doesn’t take much for someone to take you to court.
There’s also a common misconception when it comes to limited liability with an LLC or corporation that most people may not be aware of. For one thing, limited liability doesn’t apply in the following circumstances.
- You have acted in a negligent or irresponsible manner.
- You have done something illegal with your business whether you are aware of it or not
- You have signed a personal guarantee for a loan
- You have mixed your personal expenses with your business expenses. In other words, you are not treating your business as a separate entity
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What Do You Stand To Lose?
Let’s say that you don’t fall into any of the categories above and you run your LLC or corporation by the book. What do you stand to lose? With a pass through entity, you might not think that you have much at stake but think about it this way.
If you lose a lawsuit, your entire business is at risk. The plaintiff can take away your website, your business and all of your business assets.
Even worse, you will lose a piece of your mental health. After all, you worked hard to get your business up and running and insurance will help prevent it from being taken away from you.
What Else Isn’t Covered With An LLC Or Corporation?
The other thing that is often overlooked is the major hassle involved if you do in fact get sued. If you don’t have insurance, you have to go through the trouble of responding to the complaint, possibly hiring a lawyer and handling everything yourself.
If you have business insurance however, you just let your insurance company know about the complaint and they will take it from there.
Often times, they have lawyers in house that will respond and handle the paperwork for you similar to how a car insurance policy works. Having this peace of mind is absolutely worth it.
In general, business liability insurance protects your small business in the event of a lawsuit for personal injury and/or property damages. It will cover the damages from the lawsuit in addition to any legal costs involved.
What Are The Different Types Of Small Business Insurance?
- Product Liability Insurance: This is the category that our wedding linens business falls into. If you sell or manufacture products, product liability insurance will protect you in the event that a customer becomes injured while using your stuff. For our wedding linens business, you might think that it would be difficult for someone to get injured using our napkins or handkerchiefs. But for example, someone could sue us if they weren’t happy with the quality of our product which in turn might have ruined their wedding and caused them mental anguish. It’s ridiculous I know, but it could happen. The amount of coverage and the level of risk depends on your business type. For us, we don’t have to pay as much for insurance because our business is considered fairly safe.
- General Liability Insurance: General liability insurance is the main coverage that protects your business from injury claims, property damage, and advertising claims. As the name implies, this is an all encompassing policy for your business and might be the only thing you need depending on what your business sells.
- Professional Liability Insurance: If you provide business services of any kind, you should probably get professional liability insurance. This coverage protects your business against malpractice, errors, negligence and omissions. Depending on what you do, you might be legally obligated to purchase this insurance. For example, all doctors are required to carry malpractice insurance.
Don’t Risk It
There is more at stake than you think when you don’t purchase insurance. If anything, you should consider your mental health.
Are you willing to risk losing all the hard work you put into your business?
Are you willing to deal with all of the hassle involved if you do in fact get sued?
Think of your LLC or corporation as bankruptcy insurance. Sure, you can’t lose it all but you sure can lose enough for it to be extremely painful. Check with your local insurance company to see if the costs are worth it.
Getting Help
Personally, we use CorpNet.com whenever we have questions of this nature. And what’s cool is that they’ll give you a free consult regarding your specific situation.
Click here to give them a try and mention coupon code: MWQHJ for 10% off!
Also, if you have any other questions, feel free to send me an email and I’d be happy to provide you with my opinion.
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Steve Chou is a highly recognized influencer in the ecommerce space and has taught thousands of students how to effectively sell physical products online over at ProfitableOnlineStore.com.
His blog, MyWifeQuitHerJob.com, has been featured in Forbes, Inc, The New York Times, Entrepreneur and MSNBC.
He's also a contributing author for BigCommerce, Klaviyo, ManyChat, Printful, Privy, CXL, Ecommerce Fuel, GlockApps, Privy, Social Media Examiner, Web Designer Depot, Sumo and other leading business publications.
In addition, he runs a popular ecommerce podcast, My Wife Quit Her Job, which is a top 25 marketing show on all of Apple Podcasts.
To stay up to date with all of the latest ecommerce trends, Steve runs a 7 figure ecommerce store, BumblebeeLinens.com, with his wife and puts on an annual ecommerce conference called The Sellers Summit.
Steve carries both a bachelors and a masters degree in electrical engineering from Stanford University. Despite majoring in electrical engineering, he spent a good portion of his graduate education studying entrepreneurship and the mechanics of running small businesses.
It’s a complicated world, isn’t it? It is definitely worth it to look into insurance and do a quick analysis to see if it is worth the cost for you. If you keep your business on the up and up and it is thinly capitalized (you don’t have tons of money or other assets in it, only your own effort) then the value of being insured is much less than a company that has a ton of money invested into it.
You bring up a good point about piercing the corporate veil. Most people think an LLC will protect them from but its not that simple. I’m going to pass this on.
Product liability insurance is very important. Although it is an investment, it is a smart investment. I started a manufacturing business about three years ago. It is still relatively small, but I use product liability insurance for products I manufacture.
Thanks for this info! This has been a great help for me.
This article is wonderful. I’m surprised by how many people are out there that don’t realize you need to do more than just set up an LLC to protect yourself; you need to keep EVERYTHING separate. Insurance is often where people make their biggest mistakes, which as we all know, can be insanely costly when the business realizes that the insurance they’ve been paying so much on for years won’t protect them anyway!
Professional Indemnity Insurance is always good to have especially if your work is a sensitive one and you are dealing with other people’s money such as bank, forex, ect.
I want to start up a house cleaning service. what insurance do I need?
It’s essential that you find the right LLC insurance to protect your business against coverage gaps. A Trusted Choice member agent can help you find LLC insurance coverage that meets your needs.
General liability insurance is the main coverage in most contractors’ insurance packages.
If i go out as a sub contractor under other companys and there insurance covers me do i have to have general liability to become llc
You make a great point about getting liability coverage if you provide any kind of service as a business. You could be in trouble if you are accused of malpractice and you don’t have any coverage to save you. I’ll have to keep these business tips in mind so I can stay protected in the future.
what best insurance coverage fit for staging business? any suggestion will help
Hello my Name Is Brenda Eggart I have tried to file a claim with The policy under Charlie Horse restaurant in Ocala, Florida being the named insured for two weeks. Charlie Horse insist your phone is correct and honestly, something seems a miss, because no one has returned my numerous calls, I spoke only to recorder that took my information. Never received a call back. I have contacted State of Florida Insurance Commissioner and if you do follow through and call me then trouble will follow. My number is 352-425-2495. I expect a. Call back from you today. Again, my Name is Brenda Eggart. As I feel something is not right? Are you in business any longer or is Charle Horse insured with you? Let’s get to the bottom of this situation today. Respectfully, Brenda Eggart
I never knew that the chances of getting sued in the US were higher than anywhere else. My husband and I are thinking of starting a new business and we are starting to look into business insurance. We will need to contact a specialist to make the best choice, but in my opinion, getting insurance from the beginning will benefit us.
he is sole owner of his business he has business insurance dose he need to get llc he owes nothing to anyone