Dissecting Limited Liability

Limited liability companies (LLCs) are an extremely popular choice of entity in today’s small business environment. One of the many stated reasons for that choice is an attempt to limit the liability of the owners of the business.  But what does that really mean?

There are multiple ways in which an LLC can benefit business owners from a liability perspective, but there are a few foundational principles that can really help explain the concept of limited liability, particularly when compared to a general partnership.

Consider a simple example.  Suppose two people go into business together, Person X and Person Y.  Suppose that during the course of the operation of their business Person Y is negligent and injures a third party, an injury which is beyond the scope of the company’s or Person Y’s insurance policy.

Person Y may very well have a personal liability problem.  He was the negligent actor.

The business (regardless of what type of business it is) may very well have a liability problem.  Person Y was acting on the business’ behalf when he was negligent, making the business liable as well.

If the business is a general partnership, Person X may very well also have a personal liability problem due to being the business partner of Person Y, the negligent party.  However, and this is the key, if the business is a limited liability company, Person X would NOT have a personal liability problem because his liability is limited to his investment in the business.  In other words, the business might experience a loss due to Person Y’s negligence, but Person X can avoid his personal assets being used to remedy the problem created by Person Y.

Certainly, there are more applications of the limited liability principle that just these.  Consider a similar analysis where an employee is the negligent actor, for instance.  However, at the end of the day, the above example, as extrapolated and applied to various circumstances, is really at the core of what limited liability is all about.

–        Mark Coriell

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