When choosing from the types of liability insurance available, the small business owner may need specialized forms of liability insurance that will cover exclusions from a standard comprehensive general liability policy.

When choosing your organizational form, there are two types of liability to consider in deciding how to structure and fund what will be your most likely entity choices--the limited liability company (LLC) or corporation:

Insurance is the last line of defense for a small business owner executing an asset protection plan. So once an owner has a basic understanding of some general coverage guidelines, it's time to choose the types of policies.

Some organizational forms offer owners better limited liability protections than others. For example, many states grant the owners of an limited liability partnership (LLP) less liability protection than the owners of an limited liability company (LLC).

Of the two main types of liability insurance, the comprehensive general policy is the primary form of coverage for small business owners seeking to use insurance as a last resort in their asset protection planning.

One of the most important considerations when choosing an organizational form is the impact of liability on your structuring/funding decisions.

To avoid day-to-day liability risks when running a small business, the mere formation of a limited liability company (LLC) or a corporation is not a sufficient asset protection strategy. As discussed in our section titled, "Limit Liability in Your Business Structure," the entity must be structured and funded properly to limit exposure to liability.

A limited liability company (sometimes known as an "LLC") is a combination of a corporation and a partnership. Although it is treated as a partnership for purposes of the federal tax code, its owners (members) have limited liability. This means that the most that they can generally lose is their investment in the company. In contrast, sole owners and partners have personal liability for the debts of their businesses. They may have to use personal, nonbusiness assets to pay off a business debt or loss.

At first glance, as a small business owner, you are faced with a somewhat confusing array of organizational forms in which you can operate your business:

When choosing an organizational form for your business, one of the important considerations involves the concept of limited liability. Only in the corporation and LLC form do all of the owners enjoy full "limited liability" in every state. But what, exactly, is limited liability?