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Limit Your Liability

Posted by on October 16, 2017 at 3:25 PM

Owning a small business can be rewarding but there are great risks involved in doing so. In today’s litigious society, a lawsuit can cause financial havoc for a small business by leading to its closure, or far worse, placing your personal assets in jeopardy.

For your protection, it is important to legally separate your personal assets from your business and minimize liability. This is done by incorporating your business or forming a limited entity, such as an LLC. Upon formation, the business will legally be a separate entity that operates independently from you. This means, in the case of a lawsuit against your business, although the business can be sued, your personal assets (ie. your home and savings) will not be subject to recovery.

In addition to shielding your personal assets from your business, both a corporation and an LLC offer “limited liability.” Limited liability means in the case of a lawsuit, your liability will be limited to the total investment and assets in the name of the business.

More traditional ways to operate a business are as a sole proprietorship or partnership. Operating as a sole proprietorship or partnership does not offer legal separation between your business and personal assets, nor does it offer limited liability. By operating in this manner, your personal assets can be recovered against to satisfy a judgment if your business is sued.

To illustrate, take a business with a total investment and assets of $50,000 that is sued for $100,000. If the business is formed as a corporation or LLC, it can only be held responsible for a maximum of $50,000. There is no personal liability on behalf of the business owner. However, if the business was operated as a sole proprietorship or partnership, the business would be responsible for $50,000 and the owner would be personally liability for the remaining $50,000 from their personal assets.

This information does not constitute legal advice or an attorney client relationship*

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