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Limited liability company (LLC)
A limited liability company (LLC) can be formed by a small business owner to separate their legal and financial liabilities from those of their business, providing a degree of protection.
What is an LLC?
More specifically, LLCs can help shield business owners from debt, lawsuits, or bankruptcy their business may face. In fact, forming an LLC can benefit a wide range of small businesses and can provide a major advantage over sole proprietorship.
If your business is run as a sole proprietorship, any of your personal assets are treated as part of the business for any financial liabilities such as debt, lawsuits, or bankruptcy. Your personal assets and business assets are essentially one and the same.
If your business is an LLC, your LLC is a business entity that’s a separate legal entity from yourself. Your personal liability and financial liability are protected from your business's debts and liabilities.
LLCs provide legal protections similar to those of corporations, but with fewer restrictions. The owner of an LLC isn't required to have a board of directors, shareholder meetings, or maintain the same level of documentation that’s required of a C corporation.
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View video transcript.
[video: an animated header displays the Insureon logo. Underneath it, a subheading displays the text: "What insurance do I need for my LLC?"]
MALE VOICEOVER: By becoming an LLC, you've reduced the risk to your personal assets that can exist with other types of small business structures. But you also need to protect your business assets too. There are several insurance policies that provide sustained peace of mind and safeguard your business.
[video: an illustrated header displays the text: "General liability covers:"]
[video: Under above header, three bullet points display the text: "Slip-and-fall accidents"; "Client property damage"; "Product liability lawsuits"]
General liability insurance covers third-party accidents, such as customer injuries or property damage.
[video: an illustrated header displays the text: "Commercial property covers:"]
[video: Under above header, three bullet points display the text: "Fires"; "Storm damage"; "Equipment theft"]
Commercial property insurance covers costs if your business property is damaged, destroyed, or stolen.
[video: an illustrated header displays the text: "A BOP covers:"]
[video: Under above header, three bullet points display the text: "Client accidents"; "Stolen or damaged property"; "Business interruptions"]
A business owner's policy or BOP bundles general liability and commercial property insurance together. It typically costs less than buying each of those two policies separately.
[video: an illustrated header displays the text: "Professional liability covers:"]
[video: Under above header, three bullet points display the text: "Accusations of negligence"; "Missed deadlines"; "Errors that cost clients clients money"]
Professional liability insurance, also known as errors and omissions insurance, will protect your business from lawsuits related to work mistakes and oversights.
[video: an illustrated header displays the text: "Cyber insurance covers:"]
[video: Under above header, three bullet points display the text: "Data breach notification costs"; "Data breach investigations"; "PR costs for reputational harm"]
Cyber insurance can help your business financially recover from data breaches and cyber attacks.
[video: an illustrated header displays the text: "Workers' comp covers:"]
[video: Under above header, three bullet points display the text: "Work-related medical expenses"; "Disability benefits"; "Lawsuits from employee injuries"]
Workers' compensation is required in most states and can provide coverage for work-related medical costs for any injured employees.
[video: an illustrated header displays the text: "Commercial auto covers:"]
[video: Under above header, three bullet points display the text: "Auto accident injuries"; "Illegal funds transfer by an employee"; "Client contract requirements"]
Commercial auto insurance can provide coverage for the costs of auto accidents involving any company-owned vehicles.
[video: an illustrated header displays the text: "Fidelity bonds cover:"]
[video: Under above header, three bullet points display the text: "Employee theft or fraud"; "Property damage caused by vehicles"; "Vehicle theft and vandalism"]
Fidelity bonds provide reimbursement to your client if an employee steals from them. These bonds are also sometimes required in contracts.
[video: an illustrated header displays the text: "Why is insurance important for an LLC?"]
So why is it important for you to have insurance for your LLC?
[video: an illustrated header displays the text: "LLCs may need insurance to:"]
[video: Under above header, three bullet points display the text: "Sign a contract or lease"; "Apply for a loan"; "Comply with federal or state laws"]
You may need coverage to sign a contract or lease. You also might need insurance to comply with federal, state, or local laws.
[video: an illustrated header displays the text: "Insurance can also help:"]
[video: Under above header, three bullet points display the text: "During business closures"; "Gain client trust"; "Attract talent"]
Insurance also protects you and your LLC from catastrophic losses that could shutter your business. Plus the right coverage can help you gain client trust.
Get the best coverage for your LLC with Insureon today.
[video: an illustrated white header displays the text: "Insureon is your #1 agency for small business insurance"]
Click the link to get started.
[video: an animated header displays the Insureon logo]
Forming an LLC operating agreement
To create an LLC, you’ll have to file articles of organization with the Secretary of State’s office in the state where the LLC operates, according to state laws. Your LLC filing will require filing fees and annual fees. The average annual filing fee in the United States is less than $100.
Many LLCs have an operating agreement that serves as the articles of organization and defines the business structure of the LLC, the relationship between the LLC owners, their duties, rights, and responsibilities.
Whether you have a single-member LLC or a multi-member LLC, you’ll likely need a registered agent who can accept the LLC’s tax and legal documents for tax purposes and other business requirements. The agent can be one of the members of an LLC, or someone designated to help manage the business, such as a lawyer or an accountant.
How does an LLC pay taxes?
An LLC can have any number of owners and typically provides income to the owners on a pass-through basis, just like a sole proprietorship or partnership. Income that members receive from an LLC is usually reported on their personal income tax return.
However, an LLC can also choose to be taxed as a corporation, with the members treated as employees and the LLC tax return filed separately from individual tax returns.
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How are LLCs regulated?
Each state restricts the types of businesses that can form an LLC, with all of them forbidding banks and insurance companies. Some states require LLCs to pay an annual fee costing hundreds of dollars, and to file paperwork each year, or every other year, with information on their business activities. More information can be obtained from the Secretary of State’s office in your state.
LLC vs. S corporation: What’s the difference?
Both LLCs and S corps, also known as an S subchapter, are often used by small business owners for their legal and financial advantages. While each allows the pass-through income of company profits and provides some liability protection for the owners or shareholders, there are differences between the two.
LLCs are easier to create and don’t have to abide by Internal Revenue Service (IRS) restrictions on the number and types of shareholders or members. LLCs are typically used by sole proprietors or partnerships, such as landlords, attorneys, and accountants. LLCs also face no restrictions when it comes to divvying up profits.
While S corps require more paperwork and restrictions, they have the upper hand in terms of financing. S corps can sell shares to investors, whereas LLCs typically rely on bank loans. S corps also have to report their earnings and file federal tax returns, even though they are largely exempt from corporate income taxes.
What insurance policies do LLCs need?
An LLC protects your personal assets, but that's no reason to skimp on LLC insurance. You'll want to consider these policies to protect your business from costly accidents and lawsuits:
General liability insurance is usually the first policy that an LLC buys. It covers the cost of lawsuits over third-party injuries and property damage.
Business owner's policies (BOPs) combine general liability coverage with commercial property insurance at a lower rate than if purchased separately.
Professional liability insurance, also called errors and omissions insurance (E&O), protects your LLC from lawsuits related to the quality of your work.
Workers' compensation insurance is typically required by state law as soon as you hire an employee. It covers medical costs in the event of a workplace injury.
LLCs can deduct the cost of business insurance from their taxes, since it's considered one of the costs of doing business.
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Updated: April 29, 2022
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