A Layman’s Guide to Understanding Limited Liability

If you are a small business owner you have options when it comes to how you organize your company from a legal standpoint. As you begin to educate yourself on the choices that are at hand, one very important point to keep in mind is the issue of liability.

Liability can be a fairly complicated issue, one that is oftentimes best understood by way of example:

Let’s say you’re the owner of a small take-out business with a small storefront and only a few employees. The obvious choice for you given the seemingly simple nature of your business might be to remain a sole proprietor. And while that may seem to be the least complex and less cumbersome option, it is important to understand its associated risks.

The truth is that you could go for years operating under this scenario and never have a problem. But what if one of your customers slips one day on the ice just outside the entrance to your establishment? Then what happens?

Well, if you’re a sole proprietor and that person suffers any kind of serious injury, it’s not just your business that’s in jeopardy―it’s your personal assets as well.

Fortunately, there is a fairly simple and straightforward option available to the small business owner, one that can offer much-needed protection in an unfortunate instance like the one just described―it’s called an LLC, or Limited Liability Company.

In the case of an LLC, a business operates as a separate legal entity apart from its owner or owners. As such, anyone with an ownership stake in the company is not liable for any financial obligations that fall outside the realm of what they own directly, and their personal assets are therefore generally protected.

Although setting up your small business as an LLC can protect you when the unthinkable happens through no fault of your own as a small business owner, it’s important to note that it won’t cover you in the event that a wrongful act is committed. For instance, if you get into an altercation with a customer and shove that person in a moment of anger such that they fall and are injured, then your ability to protect yourself from personal liability is minimal at best. In the event of a scenario such as this, the sad fact is that no amount of thoughtful planning on your part may be able to protect you or your assets.