Why LLCs Are Not a Substitute for Insurance
By Carey Miller, Shareholder
Starting a new business can be an exciting endeavor. For many, the business launch is accompanied by a surge in optimism making it easy to overlook key risk management steps. Many new entrepreneurs are inclined to prioritize the management of their personal risks and are quick to organize their business as a limited liability company (LLC). While an LLC structure offers crucial protections for a business owner, other key risk management steps, such as obtaining the right types of business insurance, cannot be overlooked. This article highlights the distinct functions of forming an LLC and obtaining comprehensive insurance, underscoring why both are integral to a sound business model.
Understanding LLCs
An LLC is a type of business entity that combines the flexibility of a partnership with the liability protection of a corporation. An LLC is a separate legal entity, possessing its own legal rights and responsibilities that are separate from its owners (members). Because an LLC is a separate entity, its members’ personal assets are generally protected from the LLC’s debts and liabilities. This is a huge benefit for business owners; however, it is not a cure-all. Organizing as an LLC will not protect the business from its debts or liabilities, nor will it protect the business assets.
Understanding Insurance
In contrast to an LLC, insurance can provide protection for the business by reducing the financial impact of certain events.
For instance, if an LLC is sued for negligence, the company’s commercial liability insurance could cover the legal fees and any resulting settlement. Likewise, if company property is damaged by a fire, commercial property insurance could cover the costs of repairing or replacing the business assets.
Comprehensive insurance coverage can also include coverage for business interruption, protecting the LLC member’s income if a company is unable to operate due to a covered event, such as a natural disaster. There are many different types of insurance that can be tailored to the specific needs of a business, making it an invaluable tool for mitigating risks.
Why Insurance is Indispensable for LLCs
LLCs and insurance serve different purposes and it is important to view them as individual steps in establishing a sound business model. Forming an LLC can protect the business owners while obtaining insurance in the LLC’s name can protect the business assets and both are complementary elements of a holistic risk management strategy.
Each business is unique and, consequently, faces its own specific set of risks. With a comprehensive set of insurance policies in place, LLC members can ensure that they are not just protecting their personal assets but also safeguarding the business they worked so hard to build. By doing so, they can help to secure the long-term sustainability and success of their business.
Consulting an attorney is important when making the right decisions for your business. If you would like to speak to one of our expert lawyers, give us a call today. We are here to help with this or other business-related matters.
