What Is Limited Liability and Why Is It Important?

As a small business owner, you’ve probably heard the term “limited liability” a few times. It may be because you formed a limited liability company (i.e., an LLC), or you’ve heard people use the phrase about why it was important to form an entity. If you’re trying to better understand that phrase, this article will help you.

Liability 

If you are liable for something, it means that you are responsible for it. If your product hurts someone, or an employee runs over someone while driving the company vehicle, liability attaches to your business. The company will have to make the client or bystander whole.

As a business owner, you don’t want the liability to extend to yourself. Meaning, you don’t want someone who has been hurt by the company to be able to come after your personal assets – your home, your car, your retirement savings, your kids’ college accounts – if the assets in the company are insufficient.

Limited Liability

This is why you formed an entity – either a corporation, a limited liability company, or a limited partnership – to protect your personal assets. As we’ve shared in other articles on this site, a sole proprietorship or a general partnership will not do so. With the creation of an entity, you have a first line of defense against claims.

Piercing the Corporate Veil

However, there is always a caveat. You can set up an entity, but you can still end up being liable for the losses of the company in certain circumstances. This is what lawyers call “piercing the corporate veil.” It’s as if the corporate entity is a veil protecting you from the outside world, and one can go through it in certain circumstances.

How does it happen?

One way is for you to not operate your business as a business. This means that you don’t follow corporate protocols such as separation of assets, maintenance of corporate books and records, and the like. It can also happen when the corporation is set up with the intend to defraud another person or entity. 

Other Reasons You Can Be Liable

In addition to corporate veil piercing, some professions are not able to escape personal liability for certain actions. For instance, attorneys cannot escape legal malpractice claims simply by creating an entity. The public policy is that lawyers should be bound to high standards of conduct and not be able to potentially engage in risky behavior by having their assets shielded from bad conduct. Other professionals have this same exposure, typically those that are licensed and registered professionals.

What To Do?

There are several ways to ensure that you keep your limited liability. First, have the correct entity. Second, maintain the entity properly. Third, do not engage in fraudulent actions that harm employees, clients or the general public. And, fourth, obtain liability insurance to protect you if there is either a piercing of the corporate veil, or you don’t have the ability to shield your assets due to function of law.

Contact LOVE LAW FIRM for help in maintaining your corporate formalities to protect your assets. 

Francine E. Love
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Founder and Managing Attorney at Love Law Firm, PLLC which dedicates its practice to New York business law