TOS 05: Limited Liability Protection: What is it and do I need it?

Last week on the blog, we discussed what factors needed to be considered when deciding whether or not to incorporate your business. Today, we will dig a little deeper and discuss one of the main factors in making that decision: whether or not you need limited liability protection.

WHAT ARE WE TRYING TO PROTECT?

The concept of limited liability deals with the assets, or property you own, and how much of it is at risk when you enter into transactions with the world. Generally speaking, we all have property. If you're an adult, you may have a car, a computer, a home, electronics, money in the bank and other valuables. When a contract is signed, we make a promise to pay something or provide some type of service. If we fail to keep that promise, our property is on the line. Someone could sue us and take these items we value. 

WHAT IS LIMITED LIABILITY PROTECTION?

Limited liability is a way of protecting your personal assets when you enter in business transactions. Often times, even though small business owners use their own personal assets, they typically dedicate or separate these investments. For example, you may save $10,000 to start your business, but leave your home, car, and personal bank information separate. The concept of limited liability is a way to protect the items you have kept separate. It's a way to get the law to recognize the line you've drawn between what belongs to the business and what belongs to you. When you have limited liability protection, you are telling the world that when it comes to your business they can only go so far with regards to pursuing legal action against you. 

DO YOU NEED LIMITED LIABILITY PROTECTION?

Ultimately, it doesn't hurt to have the protection limited liability provides, but it does come with an additional cost and responsibility and to be frank, it is not a cost or responsibility every business needs to bear. The important things to consider are in deciding whether you are a good candidate to seek limited liability protection are:

• What assets am I trying to protect?
• What type of risks am I exposed to in my business?

When you ask the first question, "What assets am I trying to protect?" you are asking yourself if currently have anything a creditor or disgruntled contact could try to go after if you found yourself in a legal proceeding. If you have personal investments in stocks, or you own a home, or a car, those would be considered serious assets that you probably do not want a creditor attacking. If, on the other hand, you are a student just starting out who has a 15 year-old car, no stocks, no house, but is simply pursuing a dream, you may not need the protections of limited liability at this time. 

The second question concerning risks forces you to ask, "Does my business put me on the line for people suing me?" An example of a risky business would be someone entering into a health related industry. When you are dealing with someone's life...most people would consider that pretty risky. The same can be said of individuals dealing with food or beverages. However, if you run an etsy shop where you sketch pictures of loved ones, your risk may not be as high and limited liability protection, at this time, may not be super high on your priority lists.

The issues addressed above are truly just a primer on the concept of limited liability. Next week we will explore how to get limited liability protection and how to lose it.