Let’s say you’re self-employed and run your business as an LLC. The LLC earns $100,000 a year, and $95,000 of it goes toward your salary.
If a client unhappy with your work were to sue you, the client’s lawyer could sue the LLC for professional liability but then also sue you personally saying that your LLC wasn’t properly capitalized.
It’s a nightmare scenario, but the right precautions could prevent it.
Protecting your personal and business liability is generally a two-step process: In the related article, I explain the first part, which is to create a separate legal entity for your business, such as an LLC or S-corp, to establish a divide between your personal and business assets, and limit liability to your business assets.
But once you’ve created those business assets, those need to be protected too. You can do that with liability insurance — more than one kind, in many cases. (If you have no personal or joint assets to protect, you could also remain a sole proprietorship but still get professional liability insurance to cover your costs in the event of a lawsuit.)
If you’ve gotten appropriate liability coverage — in terms of liabilities and amounts — and someone sues you, then your insurance will pay for your legal and court costs, any judgments or settlements, and immediate damages. It will also, in the scenario above, make it unlikely the unhappy client’s lawyer would go after you as an individual.
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