An LLC (Limited Liability Company) and an umbrella policy both offer protection to the small business owner. One offers protection for the members of the LLC while the other protects the business entity. The protections afforded by both compliment each other.
What is an LLC?
There are four types of business entities, sole proprietor, partnership, limited liability company (LLC) and corporation. An LLC, similar to a corporation, protects the owners from being held personally liable for liabilities the company incurs. It is a way of protecting the owners’ personal assets. In the event the company is sued, goes bankrupt or has outstanding debts, the personal assets of the LLC members are protected and cannot be used to pay off such debts.
An umbrella liability policy is an excess liability policy. It provides liability coverage over and above the liability provided by the general liability policy, auto liability and employer’s liability (also known as underlying policies). If, for example, the LLC is sued for an amount larger than is provided by the general liability policy, the umbrella liability will respond and provide the additional coverage above and beyond what the underlying general liability provides.
Types of Liability Protection
Since an LLC protects the personal assets of its members, a creditor, landlord or business supplier cannot attach a lien on personal property such as a member’s house or car. The only recourse an unpaid creditor has is to seek payment from the LLC’s assets. An umbrella policy, however, only protects the LLC. Therefore, if one of the members of the LLC neglected to remove the patch of ice from his walkway and someone slips, falls and sues him, the corporate umbrella policy would not respond. Such a claim falls under a personal homeowners policy and a personal umbrella.
Protecting the Individual and Business
An individual or group of individuals looking to start a business venture should seek the personal protection of an LLC. Once the LLC is formed, it is wise to purchase an umbrella liability policy over and above the underlying liability policies. The extra protected afforded by the umbrella liability policy helps to protect the corporate assets.