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LLCs and Corporations: Understanding Limited Liability

by Steven B. Salcedo, Esq.
Tue, Apr 4th 2017 04:00 pm

The Western New York Law Center's Small Business Legal Clinic 

Some entrepreneurs decide to create an LLC or corporation because they want limited liability.  But what is limited liability?

Limited liability means that if a business harms someone or fails to repay a debt, then its owners are not personally responsible.  Although the creditor or harmed person may recoup its losses by taking the business's assets (e.g., equipment, inventory, money in business bank accounts), the owners' personal assets (e.g., cars, homes, money in personal bank accounts) are shielded.  Owners of LLCs and corporations generally have limited liability.   

In contrast, unlimited liability means that business owners are personally responsible for debts owed or harm caused by their businesses.  An owner's personal assets can be taken in order to repay a debt or to compensate a harmed person.  People who do business with just a business certificate (also known as a "d/b/a") have unlimited liability.  

Limited liability protection is not absolute.  For instance, if an entrepreneur guarantees a business loan, then he or she is personally liable for the loan, even if the business is structured as an LLC or corporation.  Entrepreneurs are also personally liable for harm that their own actions cause, even if they cause the harm while working for their LLC or corporation.

Consider the following example.  Janelle owns a bodega, and Carlos is her employee.  One day, Carlos carelessly knocks a shelf over, and it hits a customer.  The customer suffers an injury and incurs $30,000 in medical bills.  The customer sues and wins a $40,000 judgment, including $10,000 for pain and suffering.  If Janelle operates the bodega with just a business certificate, then the customer likely can take her personal property.  If the bodega is organized as an LLC or corporation, on the other hand, then the customer probably will have to try to collect the $40,000 from only the cash and other assets owned by the LLC or corporation.  (The customer could also recover from Carlos, who caused the injury.)  Now suppose Janelle, not Carlos, knocked the shelf over.  Even if the bodega is organized as an LLC or corporation, the injured customer can take Janelle's personal property in order to satisfy the $40,000 judgment.  In any case, Janelle hopefully has appropriate insurance to cover the losses.      

Attorneys can help entrepreneurs determine whether creating an LLC or corporation would benefit them.  This and other business law advice is available for free through the Western New York Law Center, a nonprofit organization (SBLCteam@WNYLC.com; 716.828.8417).

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