Business Liability Insurance and LLCs - dummies

By Jennifer Reuting

Business liability insurance is a good way to help protect yourself. These insurance policies add an extra layer of protection . . . the key word being extra. Most insurance policies have disclaimers a mile long and aren’t too keen about paying out in a timely manner.

Also, having insurance tends to encourage lawsuits rather than deter them. After all, if someone knows that you have insurance that will pay out, he will have much more incentive to file that lawsuit.

Your best bet is to keep the policy as your second line of defense rather than your only defense. This is especially true for small-time independent contractors such as babysitters and pet-sitters. Following are the only two exceptions to the rule of using an LLC with business liability insurance as a second form of protection:

  • Making gift baskets for your friends as a side business? If your company isn’t exposed to a lot of liability and is so small that forming a corporation or LLC would be cost prohibitive (for example, you have a business operating in California, where the fees can be pretty gnarly), then you may want to look into getting a good insurance policy and saving the LLC for later when you’re more established and have more dough.

  • Is your company professionally licensed and required to operate under a professional LLC or corporation? You probably don’t have much choice for having insurance as your first line of defense. For instance, if you’re a doctor, malpractice insurance isn’t just smart, it’s legally required.