The short answer is yes. Insurance is essential to protect you against the types of liabilities that the corporation does not cover. Insurance is also vital for covering the costs of litigation, even for lawsuits that you win or that your corporation covers.
Many people believe that by forming a corporation or limited liability company, they have acquired a “get out of jail free” card that will absolve them from all future liabilities. This is a common misconception. It would be more accurate to say that the Corporation or LLC protects its owners against two types of liabilities: (1) contract liabilities, and (2) the “indirect liabilities” that automatically flow to the owner of the business.
A contract liability is straightforward enough. It is a liability that relates to the breach of a contract or agreement. So long as your corporation or LLC signs all of your business contracts, it will protect you from the contract liabilities that you may encounter in your business.
So far so good. But what, you may say, are these “indirect liabilities” that my Corporation or LLC is supposed to protect me from? More importantly, what doesn’t my Corporation or LLC protect me from?
One could write a whole book on these issues. (Indeed, many have.) The takeaway message is that a Corporation or LLC will not protect a business owner from liability for his or her own actions—i.e., “direct liabilities.” For example, let’s say that general contractor forms a Corporation to own and operate his business. While on the job, he drops a hammer on a visitor’s head. Under the law, the fact that the general contractor happens to have a Corporation does not matter. If he was personally at fault, he is still personally liable. Hopefully, he has insurance!
The Corporation comes into play in situations where the business owner is not personally responsible, but would be held liable anyway under the usual legal principles. For example, an employer is liable for the actions of his or her employees in the course of their employment, even if the employer was not personally involved in all. A Corporation or LLC can shield the business owner by serving as the employer. This is true of other situations involving indirect liability (often referred to as “vicarious liability” in legalese), such as the liability of one partner in a general partnership for the other partner’s actions.
The takeaway message is that corporation or limited liability company can be an excellent way for a business owner to minimize his or her personal liability. But insurance is still a vital piece of the puzzle.
This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at firstname.lastname@example.org or call him at 925-327-1019.