It’s estimated that one-in-three small businesses is sued or threatened with a lawsuit at some point in its life cycle. And even if you end up winning the suit, the price of defending yourself in court can be massively expensive in terms of lawyer fees and court costs.
Seeing that you face potentially ruinous risks even if you’ve done nothing wrong, you should definitely invest in business liability protection—not only to protect your company’s assets but your personal assets as well. When it comes to protecting your assets from liability, there are a couple different angles to consider.
Two of the most effective forms of liability protection are liability insurance and limited liability business entities, such as limited liability companies (LLCs) and corporations. Because they both offer forms of liability protection, you may think liability insurance and business entities cover pretty much the same thing, but that’s not really the case.
While they both minimize financial losses as the result of lawsuits, they actually serve two distinct purposes. Given this, many business owners find their best option is to put both liability insurance and a limited liability entity structure in place. And here’s why:
Liability insurance is straightforward: You buy a certain amount of insurance coverage from a broker, and the policy pays out (and hires you a lawyer) if you’re ever sued. When you purchase liability insurance, it’s primary purpose is to protect your company’s assets—real estate, business equipment, financials—in the event of a claim or lawsuit.
Liability insurance comes in a few forms:
Given the litigious nature of our society, liability insurance is an absolute must for every business. That said, such policies come with a few limitations. For example, if the lawsuit exceeds your policies’ total coverage limits, you’re responsible for anything beyond that. Or if your insurance agent finds that your coverage doesn’t protect against the specific nature of your claim, you’re on the hook for the whole enchilada.
While liability insurance is aimed at protecting your business assets, a limited liability entity is specifically designed to protect your personal assets. Business entities like LLCs and corporations (when maintained properly) can protect your personal assets if your business is ever sued or falls into serious debt.
For instance, if your company is an LLC and doesn’t have enough money to pay its debts, creditors can’t come after personal assets like your life savings and/or home, unless you’ve signed a personal guarantee to secure the debt. Similarly, if your company is sued and your liability insurance coverage isn’t enough to cover the full cost of the lawsuit, the LLC will prevent claimants from going after your personal assets to make up the difference.
Business entities effectively form a shield between your business and personal assets, which can be impossible to get through as long as the entity is set up and maintained properly. Yet limited liability entities come with some limitations of their own.
For example, while a business entity protects your personal assets, it does not protect your business assets. So if your LLC fails, creditors can come after all of your company’s assets in order to pay the debt—just not your personal assets. As we saw earlier, protecting your business assets is what liability insurance is for.
Because liability insurance and business entities work together in this way to cover their respective limitations, many entrepreneurs put both in place for maximum protection. Yet, even though liability insurance is an absolute must for all companies, not every business will require a limited liability entity structure.
If you’d like us to help you evaluate your insurance coverage and/or determine which type of business entity is right for your company, contact us to learn more.
We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.