[granos]

If you haven't done so already, you REALLY should look into setting up an LLC for contract work in the US. Legally separating your business assets from your personal assets is very important. It doesn't cost a ton -- varies by state and whether you involve a lawyer or not. It will make your taxes a bit more complicated, but consider that the cost of insurance against somebody trying to sue you and take your house.

[zrail]

Literally just buying an insurance policy is significantly less complicated and roughly the same cost, IME. Professional liability, errors and omissions, etc. cost me ~$1k a year when I was doing consulting for $1mm in coverage. My LLC taxed as an S-corp cost more than that just in tax prep services.

A single member LLC provides some benefits but those benefits often require a lawyer to invoke (i.e. you're getting sued, gotta file things and work the legal system). If you have insurance you just tell the insurance company and they hire the lawyers.

[londons_explore]

Perhaps the US is different, but here in the UK, I reckon that 95% of software developers will never go to court in their lifetime, and the remaining ones that do will settle for small amounts (ie. Refunding the customer the cost of the contract). Multi-million pound judgements against individuals are pretty much unheard of...

[stefanfisk]

As a freelancer in Sweden I can't even imagine how big I would have to fuck up for a customer to sue me for anything beyond what they had already paid me.

[henryfjordan]

Imagine you are paid $100 to build a website to sell some new widget to be delivered on November 1st just in time for the holiday season. The company also spends $1000 on a one-day internet marketing campaign that's around the launch.

Then there's a technical issue at launch and orders are being rejected left and right.

They could be out basically the whole value of the marketing campaign which is 10x your salary. You might owe them compensation for that, unless of course you got paid through an LLC and only have the $100 in your account.

[NorwegianDude]

That's why you have contracts/ToS, so it's clear what is and isn't your responsibility.

[jlokier]

And if you have any sense, the contract expressly limits your total liabilities to the client to at most what they have already paid you.

(ps. With some careful lawyer drafting to exempt things which can't be limited in that way (negligence etc.), while carefully wording the exemption so any part voided doesn't take the whole limitation with it.)

[whatshisface]

In the US lawsuits typically open with the closest thing a lawyer can imagine to infinity dollars of damages, and then you have to have your lawyer work it down.

[ska]

E&O insurance is in absolutely no way a replacement for incorporation. In most cases if you need the former, you need the latter also, but there are many uninsurable cases where you want the protection of an LLC anyway.

[zrail]

I guess never really analyzed it in depth and just had both. What does E&O miss that a single member LLC protects against (and vice versa)?

[ska]

LLC[1] mostly does what it says on the tin: it limits the liability to the company, not yourself or other owners. Without this any debt or judgement against your company can consume potentially most of your net worth (subject to bankrupcy, etc.). In practice for a freelancer this means you can limit your liability pretty strongly, if you are passing everything through as payroll the asset value of your company can be quite small, and it's value without you nil.

On the other hand various types of corporate insurance cover you for particular risks. Depending where and how you operate you may have to have them by statute or by practicality. So you may have to carry liability insurance by law if you have an office where people visit, or a contract may require that you hold E&O insurance up to a certain amount. In a way the latter is actually your customer protecting themselves from your use of a LLC. Without it, in the case of a settlement against you, you could easily just turn around and say "fine, the corporate account has $5 in it, here you go" and then fold up the company leaving them with no recourse. With E&O coverage for certain types of errors, they know they can get covered in a settlement up to a certain amount.

E&O covers you for particular failures in providing the service you are contract for. Say you were an electrician and did some work on a new building. They sue you claiming your work wasn't to code and caused them $100k in trouble with the city - you disagree. E&O insurance covers your court costs and potentially your settlement if it goes that way. It isn't going to cover you if you get sued for libel because of things you said about them, etc.

This is also why, for example, it may be hard/impossible to get underwriters for some software consulting. Because there are not professional standards groups that are well recognized and because potential damages from software can be difficult to asses (your script change cost us $10mm in AWS fees) insurance companies may not want anything to do with it.

So that leads to a third prong of protections which you didn't mention, which is you need to pay attention to your contract terms (and set them as much as you can). Depending on your situation this can range from easy to impossible, but can have a huge impact. For example, I've successfully added clauses to limit all liability to actual spend on previous 6 mo.

[1] this is hugely dependent on jurisdiction, particularly with single member variants.

[zrail]

Oh contract terms! I completely forgot, you’re right. I’m actually pretty happy with my final retainer contract. It limited damages to the last three months of retainer spend.

[zenhack]

I seem to be in the most expensive state in the country for that. That's rent & food for a month.

But it's a one-time fee, so you're probably still right in general, but for the moment I'm mostly coasting on savings & sponsorships, focusing on the stuff I care about while I have the breathing room. I might consider being a bit more organized if/when I ramp up business again and am considering looking for new clients.