Do I need insurance if I form an LLC?
Many business start-ups are formed as an LLC (Limited Liability Company). This creates a separate business entity. Generally, this is done to provide separation of liability for the business. The intent is to protect your personal assets from business liabilities. This means that if something happens in your business and someone sues your business they cannot come after your personal assets. This is generally true, but there are limitations to this protection.
That is why you do need insurance in most instances. There are a number of reasons why this is the case. For example, your business may be one of your most valuable assets. You want to protect your business assets. If your business is successful and growing it may represent one of your most valuable assets. You want to protect that asset. If something was to happen and you lost your business assets you would have to start over. That might not seem too important in your first year, but if you borrowed money to start your business you are required to personally guaranty the debt, so you will still owe the money to the bank. Otherwise you no longer have the assets but you still owe the debt. Insurance can help protect your ability to continue in business.
Another reason to have insurance is that if you make an error and comingle your personal and business assets (like writing a business check to pay for a personal expense) you can lose your protection because you didn’t keep your personal and business accounts completely separate. That can eliminate the protections that you may be counting on. Attorneys will argue that you didn’t maintain things separately and the “corporate veil” has been pierced and you are in fact personally liable.
A third concern is that you can be sued for many reasons, whether there is an actual issue or not. If that happens it is going to cost you money – even if you win in court. You are going to have to hire an attorney, take time away from your business, potentially suffer major damage to your reputation, and lose sales, and possibly end up losing your business.
So yes, an LLC is a good idea, but it does not mean you don’t need insurance. Depending upon your type of business you may need more than one type of insurance as well. General liability insurance is the first, and Errors and Omissions is the second. Be sure to talk to a qualified insurance professional to make sure you have the protections you need!