Limited Liability - Business Law
Limited Liability is an often misunderstood concept, especially with regard to small business owners.
Business Attorneys are often asked how limited liability works, because this is often one of the greatest advantages to forming a limited liability business entity (limited liability partnership, limited liability company, corporation, etc). Limited liability basically protects the business owner for the negligence of his or her employees. In other words, the limited liability status of a company does not protect the business owner from liabilities that are a result of his or her personal negligence. Business owners that actually take part in the daily activities of a business should be aware of this fact; because this makes almost as though the business is a sole proprietorship.
Limited liability, on the other hand, is one of the biggest advantages of forming a corporation, or LLC, even if it only protects the business owner from his or her employee’s negligence. While any employee’s misconduct is likely outside the scope of employment, and would not make the business owner liable, the limited liability status is important for protecting the business owner’s personal assets. Failure to form the business properly might result in the business being recognized as a partnership, where the business owners would be joint and severally liable for the business’ debts (including judgments against the business); A Business law expert is useful for ensuring that your business is formed and operated properly.
Clients often wonder what causes court not to recognize limited liability; this is known as piercing the corporate veil. Traditionally piercing the corporate veil is a remedy the court uses after considering certain factors. To avoid the risk of having your company’s limited liability status go unrecognized it is important that the business adhere to corporate formalities. Corporate formalities are those things which are usually done when conducting a legitimate business. This includes adequate record keeping, keeping the business owner’s personal funds separate from the operating funds of the business, acting in accordance with bylaws (for a corporation) or an operating agreement (for a limited liability company) for the business in question, and treating the business’ assets as though they were your own. A Business Lawyer prepares these documents for record keeping purposes and can help ensure that the business is staying compliant. The other thing to avoid is what is called undercapitalization, and is often found where businesses fail to properly maintain adequate insurance coverage in the case of any possible misfortune. The main point here is that the business was not formed as a limited liability entity to avoid potential business debts arising from judgments against the business.
ABOUT THE AUTHOR: Christopher Dziak of BFD Lawyers
Christopher Dziak is an attorney with BFD Lawyers, he works in various areas including bankruptcy, business law, estate planning, probate, and taxes. Additionally, Chris is a local business owner and holds a degree in both law and engineering.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.