No matter the industry, being a small business owner comes with some amount of risk. Even a frivolous lawsuit that’s destined to fail can be costly in terms of time and legal fees.
So what’s the best way to protect yourself and your business from potentially crippling lawsuits and damages? Small entrepreneurs have two main choices: purchasing an umbrella policy, or forming a Limited Liability Company (LLC). Both protect differently.
An LLC separates your personal assets from your business assets. This means that, should you lose a lawsuit, the plaintiff can’t take your house, car or any other personal assets in the judgement. An umbrella policy will pay the judgement up to the limit on your policy, minus your deductible. The insurance may even defend you in court since it stands to lose money in an unfavorable judgement.
Both are affordable. Umbrella policies cost several hundred dollars per year. Depending on the state in which you live, an LLC could cost several hundred dollars to set up, and then an additional annual fees to renew.
In order to truly maintain LLC status, it’s critical to separate your personal and business assets. The first step is to get a tax-identification number for the business to make it a unique entity. The business checking account should be tied to this number. Never pay personal expenses out of the business checking account. This could create a gray area in a lawsuit and potentially expose your personal assets.
An umbrella policy can be purchased for yourself and your family, or the business can buy one for itself. Umbrella policy limits are typically very large, often more than one million dollars. They are a way to supplement another policy you may have, such as auto, home or commercial liability.
If your business involves minimal risk, an umbrella policy may be all that you need. Web design, private music lessons, artistic and courier services are examples of these type of businesses.
For businesses in industries such as construction, medical, transportation or landscaping, an LLC could be the better choice. But remember – the choice between an LLC or an umbrella policy is not an “either/or” decision. You can have both, and many businesses do. But the choice to protect what you’ve built is good business.