Insuring Your Professional Organizer Business
Many new professional organizing business owners struggle with insuring their professional organizing business and selecting their business entity type. Recently, a student asked me, “do I need to form an LLC if I have liability insurance?” She asked this question because she was trying to decide if she could start her business as a Sole Proprietor rather than an LLC. Her SCORE mentor told her he doesn’t see her being “too at risk for being sued,” and a sole proprietorship is less expensive to form than an LLC in her state.
Personal Assets vs. Business Assets
Let me begin by saying I am not an attorney, and any decision regarding legal implications is best asked of an attorney. What I do know is if a lawsuit is brought against a business and the business is not a separate entity from its owner, then the owner’s assets are at risk as well as the business assets. If the business assets cannot cover the damages claimed in the lawsuit and the plaintiff wins the case, then the business owner’s personal assets will need to pay the remaining amount of the claim. Also, my understanding is that if an LLC business owner does not behave as a business, then in the eyes of the law, the business loses the liability protection of the LLC.
Behaving as a Business
What does it mean to behave as an LLC business? Many factors but these are key:
- File Articles of Organization with the state corporations division
- Act fairly and legally. Do not conceal or misrepresent material facts or the state of your finances to vendors, creditors, or other outsiders.
- Fund your LLC adequately. Invest enough cash into the business so that your LLC can meet foreseeable expenses and liabilities.
- Keep LLC and personal separate. Get a federal employer identification number, open up a business-only checking account, and keep your personal finances out of your LLC accounting books.
- When you don’t clearly distinguish between personal and business finances, you could “pierce the corporate veil” and open yourself up to personal liability.
- Create an operating agreement. Having a formal written operating agreement lends credibility to your LLCs separate existence.
- Always use and state LLC with your business name.
- Apply for business licenses, etc., and operate the business under a “trade name.”
- Insure your business with general liability insurance and professional liability insurance (also called errors and omissions insurance).
My answer to my student was; the difference is if you are sued as a sole proprietor, your personal assets are at risk. As an LLC, only your business assets are at risk as long as you behave as an LLC and not as a sole proprietor. We (Professional Organizers) may not be a “high” risk business, but it takes one claim against your personal assets–which is what would be tapped if you are sued as a sole proprietor–to be wiped out. Yes, if you have liability insurance, that “should” cover damages, but you want to read through the exclusions in your policy to see if there is anything that is not covered. If you are planning only to do closet organizing, your risk is probably lower too. Unless you are handling high-end wardrobe items. It comes down to how well you will sleep at night as a sole proprietor. Will you lay awake worrying about being sued and losing your personal assets? If you answered yes, then your business should not be a sole proprietor business entity.
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