I have a stupid question: for a one-person business, how does purchasing an umbrella insurance compare with setting up an LLC? Say an LLC in California costs $800 a year. I think you can buy umbrella insurance covering you up to a few million for less than that. And it seems that it doesn't have the problem you point out...?
Insurance is protection from a defined set of liabilities. A lot of people conflate umbrella insurance with "everything" insurance. It's not. Wells Fargo has a good page [1] on the topic. Insurance isn't a bad idea if you're engaged in a business with specific liabilities.
It gives you a chip to play if you are sued. You can say to the plaintiff, "I have insurance that may allow us to reach a settlement without going to trial." Then you and the plaintiff engage in a settlement negotiation that may or may not be successful. You can further strengthen your position by limiting your liability to your corporation. I can tell you from my experience that you feel much more exposed when it looks like the lawsuit is coming at your personally than you do when it is your business.
