What Kind of Insurance Does an LLC Need?

by Jim Thomas
Doctors in LLCs often need more than just malpractice insurance.

Doctors in LLCs often need more than just malpractice insurance.

Ryan McVay/Photodisc/Getty Images

Many enterprises select a limited liability company, or LLC, as their form of business structure. LLCs offer you the tax advantages of a partnership -- no corporate double taxation -- with the limited liability of a corporation. For the most part, your personal assets are off-limits under an LLC, and you can only be held liable for the debts and obligations of the business itself. A number of states require health care providers to buy malpractice insurance, also known as professional liability insurance, and many health care providers are organized as LLCs. However, for the most part, an LLC is free to choose whether to cover different risks to the business by purchasing various types of insurance.

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General Liability Insurance

General liability policies can cover both the LLC and its individual members. In rare cases, when individual members can be sued personally, a general liability policy with enough coverage can be used to pay damages and shield a member's house, bank account and other assets. Coverage for the business can shield the LLC against catastrophic judgments against it, but it needs to be sufficiently high. For example, if the LLC is liable for damages in the amount of $2.5 million and it has a general liability policy with a cap of $1 million, the insurance company would pay $1 million and the LLC would be responsible for the remaining $1.5 million, which could put it out of business.

Malpractice Insurance

In addition to doctors, other professionals need professional liability insurance. If your LLC is composed of health care providers and state law does not require malpractice insurance, many professionals would obtain it anyway. Otherwise, your LLC is "going bare," and if your business is sued for malpractice, it could be forced into bankruptcy if it loses in court. LLCs comprised of other professionals with fiduciary duties to their clients, such as accountants and insurance agents, also need professional liability insurance. In the case of non-medical LLCs, such insurance policies are typically known as "errors and omissions" coverage.

Property Insurance

If your medical clinic burns to the ground, deluged by a flood or robbed, you'll be relieved if your LLC has property insurance to cover the damage. Be sure your coverage is adequate -- property insurance policies can be written to cover the actual value of the property at the time of the fire or flood or the replacement cost of the damaged or destroyed items, which is likely to be higher.

Lost Income or Key Personnel

In addition to the structure, equipment, computers and other valuable items covered by property insurance, you might want to be covered for the lost income your business incurs if you have to cease operations for a period of time. A business interruption policy can replace lost income. An LLC can also purchase a "key man" life insurance policy to provide stability if a principle member of the LLC dies. Life insurance can also be purchased for the LLC itself. The U.S. Small Business Administration and private lenders often require life insurance as collateral before approving a business loan.

Employees

If you hire employees, your LLC is required under state law to pay workers compensation insurance to cover employees who might be injured on the job. You'll pay unemployment insurance taxes as well. In a handful of states, an LLC must purchase a disability insurance policy.