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A limited liability company (LLC) is a popular business structure that provides more protections than sole proprietorships or partnerships while offering more flexibility and more favorable tax rates than a corporation. Because of the protection LLCs provide, some people may believe that business insurance is not necessary for this type of company. However, business insurance is just as crucial for LLCs and can provide valuable support that will keep your company afloat even in the face of a wide range of potential disasters, lawsuits, and other unforeseen events.
What is an LLC?
A limited liability company (LLC) is a common business structure that does not hold owners (who are often called members) personally liable for the company’s debts or liabilities. This means that in the case of bankruptcy, debts, or lawsuits, members of LLCs would not lose their savings, their house, or other personal assets. In addition, LLCs offer more flexibility in management structure and differences in how taxes are handled. Most types of business could be started as an LLC.
Do I need business insurance for my LLC?
Running your business as an LLC protects your personal property in many situations, but that doesn’t mean that your business assets are safe if you are sued. Your business may need to spend significant amounts of resources or even liquidate some assets to pay for a major claim or settlement. Even if a lawsuit ends in your favor, legal proceedings can be costly and could also negatively affect your reputation. Business insurance can protect your business from claims in these situations, providing funds to help your business respond to adverse situations.
Like other companies, insurance policies for an LLC will cover the company and its employees and managers. Members of the LLC are also covered. Except for a few specific types of insurance, such as workers’ compensation, business insurance is typically optional for LLCs. However, it’s a good idea to protect your company against the perils that could arise while doing business. In many industries and business contracts, liability coverage may be expected, and clients will often require you to have sufficient insurance before working with you.
What are the most important types of business insurance for LLCs?
The common types of business insurance that are necessary for your LLC can vary widely depending on your industry and the work your company performs, but there are a number of policies that cover common types of risks that are relevant for any business. These include:
Commercial Property Insurance
Commercial property insurance protects the value of your business’s property from many perils, including fire, explosions, windstorms, vandalism, theft, and other hazards. This is a key coverage that most LLCs will need. Commercial property insurance covers your owned or leased office space and business property, including furniture, equipment, inventory, and tools.
In addition, home-based businesses and those primarily doing their work remotely should be aware that homeowners and renters insurance policies often exclude coverage for business property, so commercial property insurance may be necessary for them as well.
Example:
- A wildfire in your area burns down part of your wine store, severely damaging the building and destroying a large portion of your inventory. Your commercial property insurance would cover the losses to the building and building contents.
Business Income Insurance
Business income insurance, also known as business interruption insurance, is a common endorsement that can be added to commercial property insurance policies. This coverage provides funds to help keep your LLC afloat if key property is damaged or destroyed, forcing you to temporarily cease operations. For businesses that rely on physical locations, like retail stores, business income insurance is a crucial coverage.
Business income insurance can reimburse you for lost or reduced income and cover operating expenses such as employee salaries, rent or mortgage payments, and taxes. Policies can also be purchased with the addition of extra expense coverage to cover any expenses you incur to keep your business operational, including rent for a temporary location, rented equipment, and moving costs.
Example:
- A severe natural disaster damages your bakery’s roof, causing it to leak. The bakery can’t continue operating until the roof is repaired. Business income insurance would reimburse you for lost income and operating expenses until you are able to resume operations.
Workers’ Compensation Insurance
Workers’ compensation insurance provides medical and financial benefits to covered employees if they suffer occupational injuries or diseases. Workers’ comp can provide funds for medical payments, rehabilitation, partial lost wages, and even vocational training while an injured employee is unable to work. In the case of a work-related death, workers’ comp can cover funeral expenses and provide death benefits for the employee’s dependents.
Benefits, eligible injuries, and requirements may differ depending on the state your LLC is located in. In most states, workers’ comp is required for all companies with regular employees, and failure to provide adequate coverage is punishable by fines or even imprisonment.
In a few states, there are specific regulations for LLCs. LLCs without employees may not be required to have workers’ comp coverage for members, and in some states, members may be able to opt out of coverage or be automatically excluded from coverage unless they opt in.
Example:
- An employee of your bookstore injures her back lifting a heavy box of encyclopedias onto a high shelf. She receives medical treatment for her injury, and her doctor recommends bed rest and physical therapy for six weeks. Workers’ comp would cover her medical expenses, physical therapy expenses, and a portion of her wages while she is recovering from her injury and unable to work.
General Liability Insurance
General liability insurance protects your LLC if you accidentally cause third-party bodily injury, property damage, personal injury, or advertising injury. Although the risk for claims is higher for companies that perform hazardous work, every company has some level of risk as accidents can and will happen at any time.
In addition, general liability insurance also features a personal and advertising injury component, which can cover cases of libel, slander, copyright infringement, and other non-physical causes of harm. Many policies also include products and completed operations coverage, which applies in cases where your company’s products or completed services cause bodily injury or property damage.
Example:
- At your computer repair store, a customer trips over loose carpeting and falls, breaking her nose. Your general liability policy would cover medical costs for the injured customer, as well as any legal expenses if she sues.
Professional Liability Insurance
Professional liability insurance is a key coverage for LLCs that provide professional services to customers, like architecture firms or financial advisors, and may be required by clients or industry organizations. Also known as errors and omissions insurance, this coverage will provide funds for legal defense and any resulting settlements or judgments if you are sued due to your professional work.
Mistakes, omissions, or failures in professional work or advice can lead to financial losses for clients, and there’s also the possibility that a client may sue you for perceived negligence, even if your company did nothing wrong. Professional liability insurance can help protect your company from expensive lawsuits that could otherwise consume your time and resources.
Example:
- You run a small accounting business. After you file a client’s taxes, the IRS conducts an audit and finds that some of the figures are incorrect. The client must pay a penalty and sues your firm, claiming that you were negligent and should have caught the errors. Your professional liability insurance would cover the lawsuit and any resulting settlements.
Commercial Auto Insurance
If your LLC makes use of vehicles, including vans, trucks, or passenger cars, you’ll need commercial auto insurance. Commercial auto insurance provides financial protection if your business is at fault for a car crash and causes bodily injury or property damage to others. This coverage also protects the value of your own vehicles if they are damaged in a crash or by another hazard, like fire, theft, or falling objects.
Example:
- You own a moving company. While driving a company truck, one of your employees forgets to engage the parking brake, and the vehicle rolls into a customer’s home, damaging a wall. Your commercial auto insurance would cover the damages to the home as well as to your company truck.
Cyber Liability Insurance
Cyber liability insurance protects your LLC against various cyber threats, including hacking, data breaches, ransomware, and more. Cyber liability insurance provides funds and resources to help companies cope with the financial losses that may result from cyberattacks, including first-party coverage to help your company recover from an attack, and third-party liability coverage to defend against lawsuits related to a cyberattack.
Example:
- Hackers gain access to your real estate company’s network and are able to access confidential information about your clients. They threaten to release the information if you don’t pay them a large ransom. Your cyber liability policy would help pay for any expenses needed to handle the situation, including paying the ransom if necessary.
Employment Practices Liability Insurance
Employment practices liability insurance (EPLI) protects your LLC if current, former, or prospective employees accuse you of wrongful treatment such as harassment, wrongful termination, discrimination, retaliation, or other employment concerns. If your company is sued for wrongful treatment, EPLI would cover legal fees and any settlements or judgements.
Example:
- An employee of your digital marketing firm who is a member of a racial minority makes a formal complaint after experiencing many instances of racial jokes and stereotyping from his coworkers. After he makes the complaint, he is moved to a less desirable role in the company. He sues your company for retaliating against him for making the complaint.
Business Owner’s Policy
A business owner’s policy (BOP) is a convenient option for many smaller LLCs. A BOP combines general liability, property coverage, business income, and extra expense coverage together in a single package. Premiums for this type of policy are typically less expensive than the cost of buying individual coverages.
Companies must meet certain requirements to be eligible for a BOP, usually based on the type of business, size of its location, number of employees, and revenue. Exact requirements vary based on the insurer, but these criteria are common:
- Own or lease a physical business location or office
- Conduct business primarily on your business premises
- Employ fewer than 100 people
- Make less than $5 million in sales
What are the best business insurance providers for LLCs?
To get an accurate business insurance coverage quote for your LLC, be sure to speak with a registered insurance agent, broker, or business insurance carrier. Below we’ve highlighted some of our most reputable business insurance partners, who we’ve evaluated based on multiple factors, including their financial strength, pricing, and customer service.
| Provider | General Liability | Professional Liability | Business Owner's Policy |
|---|---|---|---|
| Embroker | ?? | ?? | ?? |
| CoverageSmith | ?? | ?? | ?? |
| CoverWallet | ?? | ?? | ?? |
| Hiscox | ?? | ?? | ?? |
| Thimble | ?? | ?? | ?? |
When considering an insurance provider for your LLC, you should also make sure to pay attention to three major factors:
The financial strength of the company. Insurance claims are paid out of the money that an insurance company has available, so you’ll want to choose a company that has enough money to pay for potential claims. Major insurance carrier rating agencies, including AM Best, Fitch, Moody’s, and Standard & Poor’s provide letter grades evaluating the financial strength of insurance companies. Generally, it is safest to choose from insurance companies with ‘A’ ratings.
Pricing. Different companies have different models for pricing risks. You may find differences in premium rates for similar coverages from different insurance carriers. No insurer will have the cheapest rates all of the time, so it is worthwhile to shop around or work with an insurance broker to compare quotes.
Reputation for customer service. If you need to file a liability claim, make changes to your policy or billing address, or otherwise interact with the insurer, you will want an insurer with good customer service. Some insurance companies spend more than others on investments in technology and customer service. This can make a difference in your customer experience, especially when filing claims.
Final Word
An LLC business structure can reduce your personal liability, but it’s still necessary to protect your business from the many hazards that could affect it. An unexpected lawsuit or catastrophe could be enough to bankrupt many small companies. With the financial assistance provided by comprehensive coverage and a collection of insurance policies, you and your clients can feel confident that your business will be able to weather any unexpected incidents and continue to thrive.
