If you have recently thought about starting your own business, there is a good chance you have looked into the option of a Limited Liability Company (LLC). There are many reasons why one might consider an LLC. They provide good structure and come in handy when tax season comes around. An LLC also protects owners from personal liability, but that does not mean you have protection from everything.
Whether you are considering an LLC or already have one, it is important to understand insurance and how it benefits your business. Without this knowledge, you might make some costly mistakes.
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Why should LLC owners invest in insurance?
Many people believe that having an LLC eliminates the need for insurance. Yes, an LLC already helps with liability, but it is not magic. Without proper insurance, your business and your assets are still at risk. Running a business is complicated, especially in the beginning when you are still learning. It is pretty easy to make mistakes along the way without even realizing it. When those with insurance make errors, they tend to have protection in vast ways.
An LLC protects your assets, but it does not necessarily cover the aspects of your business. If you have employees within your LLC and they have an accident in the workplace, without insurance, a lot of money could be on the line. You risk having to pay a high price out of pocket, potentially losing parts of your business along the way.
There is always a risk that an incident occurs that might result in someone suing you or your business. Life is a rollercoaster, and you truly never know what is coming next. Even the most successful companies that seem to do everything exactly as they should are at risk. Insurance might seem like a waste, but it takes a single incident for insurance to become a necessity. Do not end up in a situation where you regret not taking the time to understand insurance and select the best plan for you.
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What is at risk when LLC owners do not get insurance?
An LLC is not an untouchable business structure. Sure it can protect you from liability in some capacities, but there are many things only insurance can fix. With an LLC, no one can come after your own assets. This includes your home, vehicle, or accounts. However, they can go after any money you have invested into your business. If you were to go into debt or face a lawsuit, your assets might be safe, but that is about it. Without insurance, if things get bad enough you risk having everything you have built taken away from you.
It is easy to find yourself making a mistake even if you thought you were doing everything right and had no intention of slipping up. There are tons of examples of situations you might find yourself in where having an LLC is not enough. According to CoverWallet, even if your business is an LLC, you will not be protected from:
- Filing taxes incorrectly
- Engaging in reckless behavior or fraudulent activity
- Injuring someone on the job
- Causing damage to your business due to irresponsible behavior
- Committing a crime
- Failing to separate one’s individual expenses from their business accounts
In all likelihood, you have already put time, energy, money, and a large amount of love into the LLC you have created or are thinking about creating. With 39% of small business owners using cash to get their business off the ground, many individuals have a lot on the line.
There is always a chance for accidents to be made by you or your staff. It is best to expect the unexpected. Few people found themselves prepared for the global pandemic that wiped out many small businesses.Do not risk everything by skimping out on insurance.
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What kind of insurance does an LLC need?
There are a few different insurance options to consider for your LLC. In many states, it’s required that LLCs have:
- Workers compensation insurance- This insurance allows your employees to receive benefits if they get sick or injured at work.
- Disability insurance- This comes in handy for employees who can not work due to a disability or illness, providing them with a portion of the income they would have made at work.
- Unemployment insurance tax- This insurance is federally required and is set in place to protect employees that lose their jobs as long as they meet requirements.
There are plenty of other insurance options out there you might consider to protect your business thoroughly. For example, liability insurance is an excellent option as it protects owners and their businesses. Other insurance options to consider for your LLC include:
- Business owners policy (BOP)- This is a package for business owners that compiles multiple insurance options all in one to protect them from damage to property, liability, and more.
- Professional liability insurance- This coverage exists to protect business owners and professionals from claims of misconduct and negligence.
- General liability insurance- This insurance can protect your business if someone is injured on the property and can help pay for damages.
- Commercial property insurance- If your business property is damaged by a storm, fire, theft, or in another way, this insurance will protect your assets. You might also consider commercial auto insurance.
There are other options out there as well. The best way to select the insurance you need is to reach out to a professional. They should guide you in the right direction to help you avoid any gaps in the policies you choose. It is easy to slip up if you make this decision on your own without guidance.
Many people pick plans they feel cover just enough or skip getting insurance entirely. This is a dangerous choice to make. Of course, you do not want to pay for more than you need, but it is vital to carefully select your insurance to protect all of your assets and the well-being of your employees and customers.
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Now you are probably wondering what this will cost you.
There is no simple answer to that question. The cost of your insurance will vary depending on the plans you select to cover your LLC. Which you acquire likely depends on the type of business you are running, the size of your business, and any employees you have. The premium will also be adjusted depending on this information, your claims history, and other factors.
What you pay for your business insurance will differ depending on the above factors. To provide you with an example of what to expect, Insureon collected the median costs for LLC insurance using their data and found:
- General liability insurance- $500 annually, or approximately $42 per month
- Business owners policy- $636 annually, or $53 per month
- Workers compensation insurance- $560 annually, or roughly $47 per month
- Professional liability insurance- $713 annually, or roughly $59 per month
- Cyber liability insurance- $1,675 annually, or about $140 per month
- Commercial auto insurance- $1,704 annually, or $142 per month
There are many providers to choose from out there who all have unique things to offer. Speaking with a professional is vital as they can guide you in the right direction and help you choose the right option for you. You want to avoid having any gaps in the insurance you select.
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The bottom line
As a new business owner, insurance likely feels like just one more cost in addition to your already extensive bill. You have probably spent a lot of money on launching your business and are hoping to cut costs where you can to avoid wasting too much money. It is a common misconception that insurance is just one of those things you can quickly get by not having. The thing is that if anything were to happen, insurance is one of the only things that will help you.
The misconception that LLCs have protection from all liability is unfortunate. People often find themselves unprepared to take on the financial burden of lawsuits or the medical expenses of their staff. Simply put, insurance seems like a waste until it is not.
Note that any funds that are not being used to directly cover necessary expenses are vulnerable. Try not to keep too much money in your LLC unless you are putting it to good use. Reinvesting your funds into growing your business or distributing them as profits is an excellent habit to develop. The more money you have within your LLC, the more you can lose.
There is no way of getting around the need for insurance. Even if it is not always a requirement for starting your LLC and maintaining it for a while, having insurance policies that protect you is one of the best things you can do for yourself and your business. Depending on the policy you select, you should have protection from slander, libel, legal expenses, and more. When turning your passion into a business, be sure to budget for a solid insurance plan.
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