LLCs, Insurance and being sued

[alyssamma]

This is a topic that comes up often on this board. It is also one that gets a lot of different opinions. I wanted to try and give some insight into this topic.

First, if you are at all worried about getting sued, having insurance is the best thing period. Get a large policy and sleep well at night.

That being said, unless you have substantial assets, the chances of you getting sued are next to nothing. If you are a college student with 10 machines and $200 in your bank account - don't worry - skip the insurance. However, if you own a house with some equity in it or other (non-retirement) assets, then you should probably get insurance.

What will an LLC by itself do to protect you? It depends on your actions. If you personally do something negligent, it won't do much. That is not because any corporate/company "veil" will be pierced. It is because you'll be named in the suit along with the LLC because you did the action. Note, the key word here is negligent. If you are drinking and servicing your machines and you get mad and toss a machine through a window, you are being negligent. If someone trips on your machine, and it is NOT placed in the middle of a walkway, you aren't.

Of course, negligent is really whatever can be proved, so this goes back to the first point - get insurance if you are worried. Still, if you are pretty conscientious and you don't have a lot of assets, the simple protection of an LLC should be enough.

Also, when I first started vending 2 years ago I remember someone asking for a case where a bulk vendor was sued. No one could find an example of that, but they did find some cases where full line vendors were sued. I think these dealt with people being electrocuted, which is something an LLC should protect you against assuming you didn’t do anything with the wiring.

So, you have to ask yourself what the odds of being sued are. You have a much better chance of being audited than sued, so think about what types of risks you take with the IRS.

Ultimately, I would make the following suggestions…

1) If you have any type of real business, form an LLC.

2) If you are worried at all about being sued, get insurance.

3) If you have any substantial assets, get insurance.

4) If your business is large enough (say, making >$1K/month profit), get insurance and form an LLC.

Kevin

[Jax Snacks]

Nice post again.  The concept of protecting me from myself has always made my head spin a bit.

The only situation I ever heard of was on another board many years ago.  A customer claimed to get a dime in his handful of candy and actually chewed on it without looking at what was in his hand.  The customer claimed the dime did damage to his teeth and that dental work would be required to fix the problem.  Not sure exactly how that case turned out and I think the customer just wanted his teeth fixed and nothing else and they settled it without a court case.  But as you stated, the customer would have to prove negligence for that dime being in the globe to get any big settlement.  Hard to imagine a judge keeping a strait face on that one!

Thanks Kevin for all that you post on this and other regulatory topics.  But it sounds like we still need to watch out for those anonymous IRS spies here!  I heard Obama hired another 16,000 agents!

[caserri]

Thanks Kevin for another great post! I smell "Noteworthy Topic" on this!

[BluePlate]

Kevin,

Great Post!

Not sure how many states this applies to, but in Massachusetts we have what is called the Homesteading Act.  For $25 you can go to the Registry of Deeds and have it put on your house.  This will protect your house from being named in a lawsuit.  Well worth the $25, just not too many people know about it.

[alyssamma]

Wow...that is pretty amazing. I had never heard of that before so I Googled it

If you live in Mass, you should definitely check this out. Here are some links providing more info...

http://www.sec.state.ma.us/rod/rodhom/homidx.htm

http://www.probatecourtiannella.com/HomesteadAct.htm

Kevin

[caserri]

Yes, we have the Homestead Act applied to our home as well so nobody get any ideas! 

[mission vending]

In Texas we only have to fill out the paperwork to get "homestead protection", no fee to pay.

We also have unlimited $ protection for the homestead. Your homestead can be worth millions and as long as it was not purchased with ill gotten gains it is protected. some states have a limit on the $ amount like 100K, worth checking to see if there is a limit in your state and how much it is.

[NinnJinn]

I hope I am not looking at the right place. when I Googled "Indiana homestead protection"  all I found was $10,000 max.

[royalforest]

Kevin thanks. You convinced me to get the insurance because my route guy said he did something to the wires in a vending machine that was down and got it working. Better yet do I have to hire someone with a license to work on my machines in order to avoid any lawsuits?

[alyssamma]

Having is license won't really help for lawsuits. I'm not sure about what is "legal". Some municipalities require a license for electrical work. I wouldn't think that applies to vending machines, but there are some weird laws out there

Get the insurance and sleep well at night

Kevin

[chris harris]

I am a vending operator and i also sell prepaid legal and identity theft protection to small businesses,self employed and the home based business. our legal protection offers 75 hours of prepaid legal hours if you or your business is named defendant or respondent in a covered civil action filed in court which is related to business activety up to 15 hours are available for pre-trial work, and the remainimg 60 hours are available upon actual commncement of trial. Along with many other benefits, take a look at the plans at www.prepaidlegal.com/hub/harris_gc

if you have any questions send me an email.

[mission vending]

IMO Pre-paid legal is a waste of money.

Here's why:

1. From your post "15 hours pre trial work and 60 hours actual trial" Most of the work in a civil case is done pre trial, filing the suit, answering the suit, requests for production, reviewing production documents, motions, prepare for depositions, the depositions, etc. So while 15 hours is helpful if you are in any kind of meaningful civil matter (too big for small claims court) you will still be out potentially thousands of dollars.

2. Most lawsuits that are filed never make it to court, they are settled beforehand so the 60 hours available there very likely won't do you much good.

3. If you settle or lose in the event of a trial how are you going to pay that? You STILL need business liability insurance to pay the claim.

4. If you have business liability insurance and you get sued guess what? The insurance carrier will pay the lawyers after you meet the deductable anyway.

5. If you are sued as a result of an automobile accident guess what? Auto insurance is a requirement in just about every state and the insurance carrier will be responsible to defend you.

So instead of paying 350-400 a year on this nonsense AND a liability policy, just buy yourself a good policy from a good company and sleep well.

[chris harris]

It may be a waste of time to you, many people do see the benefit. I have used the service and it  has benefited me in my business and personal matters. I do respect your opinion everyone has their own perception about things.