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Business Liability Insurance for Side Work?

I've done side work for many years.  I don't actively seek it out, but gigs come along here and there.  It usually doesn't amount to much money ... maybe $5000 - $10,000 per year max, but who can't use a little extra dough?  I've been wondering if I should have some kind of business liability insurance (probably E&O) for this.  I'd hate to have to defend myself in a law suit if someone decided to sue me.  I read some earlier posts on this topic and went to a couple of the sites that were recommended for this type of insurance.  It looks like it might cost something like $1000 per year.  My dilemma is that I'd hate to spend 10% - 20% of my revenue on insurance.  Any thoughts on this?

I've also heard that if I formed an S-Corp or LLC, I wouldn't really have much protection because if I was the only person doing the work, someone would sue me personally regardless of whether or not they sued my S-Corp, and I'd still have to defend myself whether I won or lost.
Anon for Now Send private email
Tuesday, March 21, 2006
Forming an LLC for protection is probably a good idea. Why wouldn't you do it? Sure, it may not offer complete protection but it has to be much better than nothing. The cost of forming an LLC in most states is definitely worth the protection it could potentially provide. And those people telling you that it won't protect you because you work alone are just guessing. No one knows for sure and it probably varies from state to state. An LLC will offer you more protection than a sole proprietorship and may even save your butt some day. And as time goes along the amount of protection it could provide may continue to grow and grow as courts start deciding more liability cases. There simply is no downside. And if you are still on the fence then contact an attorney.
Turtle Rustler
Tuesday, March 21, 2006
And as far as liability insurance is concerned, I'd go ahead and buy some even if you are only making a few thousand dollars a year. Look at it this way, wouldn't it stink to lose your whole life's savings because you were sued due to a mistake you made on some stupid hobby project?

It really sounds like you need to take a moment and assess how much risk you are willing to take for something that may only bring in a few thousand dollars a year. Don't worry, you aren't alone. Take some time and really think it through. And if you are married, talk to your "significant other" as well.
Turtle Rustler
Tuesday, March 21, 2006
Thanks for your reply.

I live in California.  So the downside is that here LLC's and S-Corp's have to pay a minimum of $800 state income tax each year.  I don't think I make enough in side work to owe $800 each year, but I'd be glad to do it if it offered pretty solid protection.  Being a Corp would make me look more legitimate and despite the procedural hassles of running a corp, I could take SOME income as draws on the company's profits and avoid the 15% employer/employee FICA.  It makes sense to me that if someone sued me personally, a jury could easily be convinced that as the sole owner/employee of this corp that I'm personally responsible.
Anon for Now Send private email
Tuesday, March 21, 2006
Go with the S Corp if that's the decision.

but it won't replace the insurance--you'll still need to own it as a corporation, or else the corp will have to pay the lawyers.

Talk to the SBA in your city.  They can help you work through the options. 

The trouble with the LLC is that they're too new and there isn't a very well-established body of law supporting them.  You really don't want to be the index case.
Ideophoric Send private email
Tuesday, March 21, 2006
LLC's are definitely new.  If you ever try to get a corporate credit card, a some companies don't even list them as a legit business structure.

There is a hell of a lot of advantage to LLC's regarding taxes.  If you are one dude, it's all on your Schedule C.  If you go the corp route you have yet another entity to file for; a pain in the ass.  Also, because they lack the notion of shareholders, LLC's, to me, feel quite a bit more organic and reflect what really happens inside small companies. 

Hopefully the body of law will mature in ten years so LLC's are the clear winner for your initial business structure and you can just "upgrade" to a corporation once you get larger.
Cory R. King
Tuesday, March 21, 2006
I think with the subchapter S corporation, it all goes on a sched C too.  Plus there's the advantage of it seeming more legit and the taking draws on the company's profits rather than all your income being subject to the 15% employer/employee FICA (social security tax).
Anon for Now Send private email
Tuesday, March 21, 2006
I think LLC's get respect.  There are some big name companies out there who are LLC's.  In the end, being "Joe Blow, Inc." or "Jow Bloc, LLC" will give you more cred then just "Joe Blow" but I dont know how much it matters between the two.
Cory R. King
Wednesday, March 22, 2006
Cory may be right about the respect view.  It does sound somewhat more responsible, but look here if you want the faqs: http://www.bizfilings.com/learning/llcfaq.asp

First - it does not decrease your liability at all.  ZERO.  It was explained to me by my attorney that an LLC protects your from your partners.  Doctor's practices tend to be LLCs.  That way, if Dr. A. removes the wrong leg, the worst they can get from the practice is his investment. 

Next - it does cost more money to run.  Not much, but some. In this your state has a big impact on it, so check with them as to how much it will cost to create AND run.

All of this sounds a little much to avoid buying insurance, which you will end up buying anyway.

BTW - I have not used and am not associated with bizfilings. However, people have mentioned the site before.
MSHack Send private email
Wednesday, March 22, 2006
The other problem with LLC's is that what you said might apply in your state and not apply at all in mine.  The LLC laws vary widely between states.  Corps have a pretty consistant body of law accross all states.
Cory R. King
Wednesday, March 22, 2006
My understanding (from the Nolo books, mostly) is that while an LLC will not protect your personal assets if you are personally sued, it will protect your personal assets in the event that the business runs out of money and goes out of business.  As long as you've run everything on the up-and-up (i.e., kept business money separate from personal money, good bookkeeping, etc.), your personal assets cannot be seized to pay off business debts.

This says nothing about liability due to negligence, just debt.

But again, I'm not a lawyer and my understanding of this comes mainly from reading books like the Nolo legal self-help books.
Jesse Smith Send private email
Wednesday, March 22, 2006
It looks like this varies by state, but here's something I found after a quick search:


Apparently South Carolina law says this:

"the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager."

Now, I assume this means that you're protected if they sue the company. What some of you are saying is that people can sue you personally for things you did while working for the LLC? That seems pretty unfair if that's the case.
Wednesday, March 22, 2006
Washington's RCW has this to say about LLC's:

"Indemnify any member or manager from and against any judgments, settlements, penalties, fines, or expenses incurred in a proceeding to which an individual is a party because he or she is, or was, a member or a manager, provided that no such indemnity shall indemnify a member or a manager from or on account of acts or omissions of the member or manager finally adjudged to be intentional misconduct or a knowing violation of law by the member or manager, conduct of the member or manager adjudged to be in violation of RCW 25.15.235, or any transaction with respect to which it was finally adjudged that such member or manager received a benefit in money, property, or services to which such member or manager was not legally entitled."

I'm not a lawer, but sounds like as long as I'm legal, they can't take my house away.
Cory R. King
Wednesday, March 22, 2006

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