Since the inception of the limited liability company (LLC) as a corporate entity in the 1970s, LLCs have exploded in popularity.1 Between 2005 and 2014, the number of businesses registering as LLCs grew 66%, and that growth trend continues today.2 If you’re running your own business, you may be registered as an LLC. Or maybe you’re considering launching a new business as an LLC entity. But if LLCs already limit your personal liability, do you need limited liability insurance?

The answer to this question is maybe — despite its name, limited liability insurance is not an insurance policy specifically for the LLC as a business entity. Rather, it’s a type of business insurance that protects the individual partners’ personal and private assets in a business.

This guide explains limited liability insurance, including:

  • What it is,
  • When you might need it,
  • What steps you can take to protect your business against liability claims.

What is limited liability insurance?

Limited liability insurance protects an individual partner’s stake in a company. A professional liability policy would protect the business if you and two co-founders form a marketing agency and split your stakes equally. But a limited liability insurance policy would protect an individual partner’s stake in the business. Think of it as personal protection for a business asset.

If you have limited liability insurance and a client sues your marketing agency for a digital ad campaign gone wrong, insurance would protect your 33% stake in the company. With limited liability insurance, each partner is responsible for taking out their individual policy.

Partners in the following types of businesses entities may want to consider limited liability insurance :

  • Multi-member LLCs
  • Partnerships
  • S-Corporations

Do I need limited liability insurance if I have an LLC?

But wait! If your business is registered as an LLC, aren’t you personally protected from liability? Not necessarily.

While LLCs do provide some protection, they’re sometimes misunderstood. When someone sues your LLC, they should not be able to go after your personal assets, only your business. However, depending on your bookkeeping practices and the way you run your business, it may be difficult to figure out where your business ends and your assets begin. Limited liability insurance can add another layer of personal protection.

What’s more, even if you have an LLC, you want your financial stake in your business protected, right? If someone decides to sue your company as a whole, limited liability protects your own business assets in the company.

Limited liability insurance vs. general liability insurance

If you already have other types of small business insurance, you may be wondering whether you need limited liability insurance, too. In many circumstances, limited liability insurance may overlap with the general and professional liability insurance you and your partners may have already gotten to protect your company.

To understand when you’re covered and when you’re not, let’s further define those two types of coverage.

  • General liability insurance can cover your business from the financial consequence of accidents that result in bodily injury or property damage to a third party.
  • Professional liability insurance can cover errors and omissions that resulted in a financial loss for the client as a result of the professional advice your business provided.

In what type of scenario are these two coverages not sufficient? Let’s say your construction business accidentally causes so much damage to your customer’s property that the total amount of damages exceeds the policy maximum of your company’s general liability insurance. In this scenario, your customer could sue your business for the excess damages. This is when limited liability insurance could help protect your interests.

Thimble: protecting your bank account

If you’re looking for the smartest way to manage your business’ liability, you probably want to start with general liability and professional liability insurance.

And, don’t worry, Thimble has your back. With Thimble, you can choose a policy by the job, month, or year. Just click “get a quote” or download the Thimble mobile app, answer a quick set of questions, receive your quote, and click to purchase — all within minutes.

Sources:

  1. Berkman Solutions. Trends in New Business Entities: 30 Years of Data. 
  2. Journal of Accountancy. The pros and cons of LLCs. 

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.