Your LLC Isn’t Insurance: Two Things Every Business Owner Should Understand About Liability Protection

whoffman3
1 day ago
3 min read

For most small-business owners, forming an LLC is one of the first steps toward protecting themselves from personal liability. And for good reason. An LLC can be an extremely valuable tool for separating the business from the individuals who own it.

But there is an important distinction that business owners sometimes overlook: Protecting yourself from business liability is not the same thing as protecting your business from liability. Those are two different problems, and they require two different solutions.

1. Your LLC Protects You—But Not Necessarily Your Business

One of the primary benefits of operating through an LLC is the separation between the business and its owners. Generally speaking, if the LLC is sued and a judgment is entered against the company, that judgment is a liability of the company. The owners are not automatically personally responsible simply because they own the business. Assuming the LLC is properly maintained and there isn't some unusual circumstance—such as fraud, improper commingling of personal and business funds, or another basis for piercing the corporate veil—the company's debts generally remain the company's debts.

That can provide significant protection for the owners' personal assets. But there is another side to the equation. The LLC itself can still be liable. If a business loses a lawsuit, the plaintiff may be able to pursue the assets of the business to satisfy the judgment. That could include cash, accounts receivable, equipment, real estate, or other assets owned by the company. This is why I tell business owners that an LLC is not a substitute for insurance. The LLC can help protect you from the business. Insurance helps protect the business from the risks of operating. You need both.

2. Your Attorney and Insurance Broker Should Be Talking to Each Other

The second point is just as important. Business owners often think about their attorney and insurance broker as serving completely separate functions. In reality, there is significant overlap between the two. Your insurance broker understands your insurance program, including your general liability, professional liability, property coverage, workers' compensation, umbrella or excess coverage, and other policies applicable to your business.

Your attorney understands your legal exposure. Those two perspectives should work together. As your business changes, your insurance needs may change as well. You may take on larger contracts, begin working with new customers, hire employees, acquire property, expand into a new line of business, or assume contractual obligations that create new risks. Your insurance coverage should keep pace. And sometimes the best time to discover a coverage problem is before a claim is made—not after. For example, a business may assume that a particular loss is covered because it has an umbrella policy, only to discover later that the policy contains an exclusion, limitation, or other provision that affects coverage. That is a bad time to learn about a coverage gap. Business owners should periodically sit down with their insurance broker and attorney and ask a simple question: “What are the biggest risks facing my business, and do we have the right coverage and legal protections in place to address them?” That conversation can be particularly valuable when the business is entering into significant contracts or taking on substantially different risks.

The Bottom Line

There is no single document, policy, or structure that completely protects a business owner. An LLC provides an important layer of protection by separating the business's liabilities from the personal assets of its owners. Insurance provides another layer by helping protect the business itself when something goes wrong. And good contracts, proper business practices, and proactive legal advice add additional layers of protection. The best approach is to think about these things before there is a problem. Your attorney and insurance broker don't need to be involved in every routine business decision. But they should understand your business well enough to identify significant changes in risk and make sure your legal structure and insurance coverage are keeping up. The goal isn't to eliminate every risk. That's impossible. The goal is to make sure that when something goes wrong—and eventually something will—you have built the right protections around yourself and your business.