LLC Insurance: What it is and why you need it

Most businesses also take out LLC insurance. We’ll explain what is LLC insurance, its benefits, and what to look for in a policy.

LLC business owner

When you’re choosing a business structure for your small business, an LLC, or limited liability company, is a great choice. An LLC can be a single-employee business, or a company with several team members. In both cases, as the name suggests, this corporate structure limits the company’s liability from claims of wrongdoing. Specifically, an LLC protects the personal assets of the business owners. Given the additional protection, many entrepreneurs choose an LLC structure vs. a sole proprietorship or corporation.

While you might assume that you don’t need additional protection if you have an LLC, there are several reasons why most businesses also take out LLC insurance. We’ll explain what is LLC insurance and discuss the many benefits of LLC insurance. Let’s do this.

What is an LLC?

An LLC is a type of business structure that protects the property and assets of the owners as an LLC is legally separated from the business owners.1 In comparison, the business owner and business are inherently linked (seen as one) for a sole proprietorship or partnership.

Additionally, an LLC provides tax benefits as there is no federal tax classification. LLC owners only file their taxes once, reporting their LLC’s income and expenses on their personal taxes. In comparison, owners of other types of companies (S-corps and partnerships) must file personal as well as business taxes.

Additionally, there are other unique benefits of LLCs:

  • LLCs can be owned by another business, as there are limited restrictions on the number of and type of owners.
  • Although LLCs are legal companies, they do not have to hold annual meetings, keep minutes, or follow a formal management structure.
  • LLCs provide some legal protection to their owners’ personal finances.
  • Profit distribution to owners is determined by the LLC and doesn’t have to be based on the percentage owned.

In short, LLCs simplify owners’ taxes while creating additional safeguards. One of the main benefits is its personal protection from some business liability, hence the name limited liability company. Let’s take a closer look below.

How an LLC protects the business owner

An LLC allows you to separate your personal assets from your business assets. Therefore:

  • Owners are not personally responsible for an LLC’s debts
  • Lawsuits (usually) cannot go after owners’ personal assets

How does this work in practice? Imagine you’re an alteration specialist who offers clothing tailoring and repairs through an LLC.

If your company goes bankrupt, you may not be personally responsible for paying its debt.

If a customer sues you for botching the tailoring of his tuxedo, leading him to spend thousands more on a replacement before his wedding or corporate event, you may not be liable.

However, it’s important to know that LLC status does not protect you against every lawsuit.

The limits of LLC protection

Let’s consider another scenario.

You’re a landscape designer who’s behind schedule installing a lawn in a client’s yard. This client is hosting a big event at their home, which is why they’re in need of your services. Should you not be able to finish the job in time and the client has to cancel their event, all the money they’ve spent on the event preparations would be wasted. If they sue you for negligence, claiming you’re responsible for their financial loss, you could be held liable.

In this situation, would you be protected?

If you have an LLC, the answer is, it depends.

Even if you’re not ultimately found to be at fault for the delay in service—perhaps the client failed to warn you of a drainage problem, preventing you from estimating an accurate timeline—you may still incur costs in the process, or even be held liable. Here are some ways you could end up losing money as a business owner:

  • If the case goes to trial, you could incur expensive legal fees, even if you’re cleared of negligence.
  • If you are found at fault, your business may have to pay out a settlement. Then, business assets including your commercial vehicle and specialized tools might have to be liquidated to pay.
  • If your personal assets aren’t rigorously separated from your business assets, there are scenarios in which your personal property and assets might be at risk, too.

How to protect your LLC: Business insurance

As you can see, LLC status is not a foolproof solution when it comes to protecting all facets of your life. There are many scenarios in which your personal assets and business assets could still be at risk. That’s why most business owners should consider business insurance. There are a few types of insurance for LLCs—let’s take a look!

General liability insurance

General liability insurance protects LLCs and LLC owners in the event of client or third-party claims of:

  • Bodily injury
  • Personal and advertising injury
  • Property damage
  • Medical expenses

No matter what type of small business you run, general liability insurance can help protect you from liability should a third party incur a bodily injury while you’re providing your services. Additionally, if you somehow damage your client’s property, then this policy can help lower the out-of-pocket expenses you would have to pay as a reimbursement. And, should any scenario occur in which a third party has medical expenses from an injury they incurred at your fault, a general liability policy can help shield you from having to pay their medical bills.

Note: General liability insurance does not cover your employees’ claims. If you have employees or work with independent contractors, you may need workers’ compensation insurance to cover injuries or medical costs they sustain on the job.

Professional liability insurance

Professional liability insurance, also known as errors and omissions insurance (E&O), protects LLCs against claims of mistakes or errors that lead to your clients’ financial or material losses. These include:

  • Missed contractual deadlines
  • Failure to deliver services
  • Unintentional mistakes and oversights
  • Negligence

Say you’re a photographer whose business is scaling rapidly. Should your reduced bandwidth lead to a delayed photoshoot, in which a client can no longer document and sell their valuable art (and they claim you lost them the money they would’ve made had they sold it), you could be liable. Or if you’re a life coach who gives a piece of advice that results in your client receiving a demotion at work, they could claim you’re directly responsible for this financial loss.

Note: While professional liability insurance covers a wide range of errors, this insurance policy does not cover criminal conduct or intentional harm.

Workers’ comp insurance

If you employee any staff it’s required (with a few exceptions) to have a workers’ compensation insurance policy. It’s important to note that requirements vary by state and by the size of your business. However, it’s one of the most important types of business insurance for your LLC. It protects your business against potential lawsuits if someone is injured and employees are compensated for work-related injuries.

Business owners policy

Business owners policy, or BOP insurance, is a few types of liability insurance bundled for small to medium business owners. While BOP policies vary from insurer to insurer and can be altered to fit your specific business. However, a standard business owners policy includes (at the very least) a bundle of:

Get insured

If you’re an LLC owner looking for general liability insurance or professional liability insurance, Thimble makes the process easy and instant. Best of all, with Thimble you only pay for insurance when you’re working. Choose a daily, weekly, or monthly policy, and you can easily receive your Certificate of Insurance, make changes to your coverage term, and even cancel, penalty-free up, to 1 hour before coverage is set to begin. And you can do it all in under 60 seconds. It’s that easy.

Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.

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