Business clients often ask me why, if they form their business as a limited liability company (LLC), would they need business insurance? Doesn’t the LLC structure protect me from liability?
You can launch a business tomorrow simply by starting to do whatever your business does, without filing with the state, choosing a business entity. If you want to sell widgets, you would get widgets and sell them. You would be a sole proprietor, you would have a sole proprietorship structure to your business. You would be your own boss, totally responsible for business decisions. That sounds perfect to many people. However, you would also be totally responsible for liabilities, and your personal assets would be vulnerable if your business was sued for whatever reason. Your business’s money and property and your personal money and property are all at risk as a sole proprietor. You might not only lose your business’s widgets in a lawsuit, you might lose your house.
To create a divide between “business” and “personal,” sole proprietors and people starting a business choose to incorporate. The limited liability company (LLC) is a common choice of business entity in Ohio. If your LLC is sued, only the business’s assets are at risk and your personal assets should be safe. (“Piercing the corporate veil” in a lawsuit against an LLC could put personal assets at risk, but that is a topic for a different blog post.) So, why would you need business insurance since your personal assets are protected?
The question becomes what happens if your business faces a large lawsuit. For example, one of the widgets you sold was defective and caused a horrible personal injury to the customer who bought it. Even if your company is found not liable, it could face financial ruin defending itself. Business liability insurance protects the assets of your business. Errors and omissions (E&O) insurance would cover the cost of defending your business in a lawsuit, while general liability insurance would cover your business in situations arising from negligence.
If you are a sole proprietor, or plan to start a business, incorporate your business to protect your personal assets. Then, purchase business insurance to protect your business’s assets.
If you want to start a business in Ohio, or have any questions about LLCs, email me at email@example.com.