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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?
A limited liability company (LLC) is a legal business structure recognized in all 50 U.S. states and D.C. It separates the business from its owners (also called members), which can help protect their personal assets—such as their home, car, or personal savings—if the business is sued or incurs debt.
LLCs are commonly used by:
- Independent contractors and freelancers
- Consultants and professional service providers
- Small retail and service businesses
- Contractors and tradespeople
- Online and home-based businesses
How LLC liability protection really works
An LLC can protect your personal assets, but that protection isn't automatic or unlimited.
Courts may hold LLC owners personally liable if the business isn't treated as a separate legal entity—a concept known as piercing the corporate veil. This can happen if you:
- Mix personal and business finances
- Sign contracts in your personal name instead of the LLC’s name
- Fail to follow state compliance requirements
- Use the LLC to commit fraud or illegal acts
An LLC doesn't pay for legal defense costs or settlements. That’s where business insurance comes in. Insurance helps cover lawsuits, accidents, and claims that an LLC alone cannot.
Does forming an LLC replace the need for insurance?
No. While an LLC can help protect your personal assets, it does not cover:
- Legal defense costs
- Settlements or judgments
- Property damage
- Cyber incidents or data breaches
- Workplace injuries
Many LLCs purchase business insurance to fully protect their business and livelihood.
Get the right business insurance for your LLC
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]
What is an LLC operating agreement?
An operating agreement is a legal document that outlines how your LLC is owned and managed. Even in states where it isn’t required, it's strongly recommended.
An operating agreement typically covers:
- Ownership percentages
- Management structure and voting rights
- Profit and loss distribution
- Rules for adding or removing members
- Dispute resolution procedures
Having an operating agreement helps reinforce the LLC’s legal separation from its owners and can strengthen liability protection.
How are LLCs taxed?
By default, LLCs are taxed as pass-through entities, meaning business profits and losses pass through to the owners’ personal tax returns.
Common LLC tax classifications:
- Single-member LLC: Typically taxed like a sole proprietorship
- Multi-member LLC: Typically taxed like a partnership
- S corporation election: Some LLCs choose S-corp taxation to reduce self-employment taxes
- C corporation election: Less common for small businesses, but an option in certain cases
Each tax classification affects how you report income, pay self-employment taxes, and file with the IRS. Many small business owners consult a tax professional before choosing a tax election.
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How are LLCs regulated?
LLCs are formed at the state level and must comply with state-specific rules. After forming an LLC, most states require ongoing maintenance, such as:
- Filing annual or biennial reports
- Paying state franchise or renewal fees
- Maintaining a registered agent
- Keeping business licenses and permits current
Failing to meet these requirements can result in fines, penalties, or even administrative dissolution of the LLC.
What's the difference between a sole proprietorship, LLC, and corporation?
A sole proprietorship is the simplest and most common business structure, especially for first-time business owners. There’s no formal formation process beyond required licenses or permits, and business income is reported directly on the owner’s personal tax return.
LLCs are easy 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.
Simply put:
- Sole proprietorship: Easiest to set up, but offers no personal liability protection
- LLC: Offers liability protection with flexible taxes and fewer formalities
- Corporation: Strong liability protection but more complex compliance and tax rules
For many small businesses, an LLC offers a practical balance of protection and simplicity.
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Sole proprietorship vs. LLC: What you need to know
A sole proprietorship is a business that’s owned and operated by one person, while a limited liability company (LLC) can be formed by an individual or a group of entrepreneurs. Each has their own unique benefits as an effective business structure.
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 (E&O) insurance, 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: January 5, 2026
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