What an LLC does - and doesn't - protect

July 17, 2008: 11:36 AM ET

LLCs shield their members from legal claims, but the company itself still carries liability risks.

Angela J. Thomas, ATM Investments, Baton Rouge, Louisiana
I am just starting out in the investment world and am still a bit green in understanding certain things. I purchased two investment properties in 2004 and am renting them out. This year, I created an investment LLC for them. My questions is, although I have the LLC with its "limited liability," do I still have to put insurance on the company?

By Shara Rutberg, Fortune Small Business contributor
Dear Angela: You don't have to, but it would definitely be wise.

Forming an LLC shields the owners, called "members," from liability, but the firm itself is still liable, explains David Sokolow a senior lecturer at the University of Texas at Austin School of Law whose areas of expertise include corporations. In this respect, an LLC is similar to a corporation, in that shareholders aren't liable but the firm itself is.

"You should purchase the same kind and amount of insurance you would if you were operating the business as a corporation. Although you may not be personally liable, third parties may not want to deal with your LLC if it doesn't have insurance," he says.

Peter Bennett, chairman of the American Bar Association section of tort trial and insurance practice, agrees.

"The selection of a form of a business is not a replacement for insurance," says Bennett, who is also president of The Bennett Law Firm, PA in Portland, Maine. "You need coverage to protect against liability."

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