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Business Liability

JUST AS YOU CAN purchase umbrella liability insurance to protect your personal life, there are policies that cover business liability. These might be part of a business owner’s policy that also provides property coverage, or they can be bought separately.

General liability insurance typically covers bodily harm and property damage. But what about the risk that someone sues you for, say, behaving negligently or making a damaging mistake? For that, you might take out professional liability insurance, such as the malpractice insurance purchased by doctors or the errors-and-omissions policies bought by lawyers, real estate brokers, consultants and others.

If you’re self-employed or run a small business, you might also want to organize the business as a limited liability company or an S corporation, rather than operating it as a so-called sole proprietorship. Why take that added step? If you run the business as a sole proprietorship, you could be personally liable if the business gets sued, while an LLC or S corporation can protect your personal finances from claims by creditors against the business. Typically, with an LLC or S corporation, you can’t lose more than the money you put into the business.

While an LLC or S corporation can provide additional protection against creditors, it shouldn’t make any difference from a tax point of view. If you operate a business as a sole proprietorship, you include the income and expenses of the business on your personal tax return, with the details listed on Schedule C. Similarly, both an LLC and S corporation are so-called pass-through entities, which means gains and losses pass directly through to the owners, who then include them on their personal tax returns.

Which is better, an LLC or S corporation? An LLC offers substantially more flexibility, involves less paperwork and may provide better protection if someone tries to seize your business stake to satisfy a personal debt. But if you envisage your business attracting venture capital funding and maybe even issuing shares to the public, you might use the S corporation structure because it’s easier to turn an S corporation into a C corporation, the structure used by larger companies. Before making a decision, consider consulting a knowledgeable attorney, in part because there are differences in state law that could sway your decision.

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