Limited liability is a term you're probably familiar with. You've heard of limited liability companies (LLCs), right? They are one of the most popular forms of business entities. In my practice, I certainly form more LLCs than any other type of entity. That's probably because they are fairly easy to maintain (especially compared to the formalities required of corporations) and provide a lot of flexibility. But limited liability also applies to other entities, such as corporations, limited liability partnerships, limited partnerships (at least somewhat), and some variations, such as the professional limited liability company (think doctors' offices, law firms, and similar "profession" businesses). So when I talk about limited liability, here, it by and large applies to all of these types of entities, but really I'm thinking about what I encounter most, which is LLCs. (Plus I've been doing a lot of research lately for my forthcoming book on LLCs, so they have very much been on my mind lately - there's my shameless plug.)
What is limited liability? I think of it as a shield. It allows your company to operate with some protection for your personal assets. So let's say your company (not you personally) enters into a contract, breaks the contract, and then the other party to the contract sues for breach and wins. They can come after the company, but because you didn't personally enter into the contract, they can't come after your personal stuff - your house, car, bank accounts, etc. That's the "shield" of limited liability. Another example - one of your employees is driving to a job in the company truck, isn't paying full attention to the road, and causes an accident where someone gets hurt. The injured party might be able to come after the company, but again, your personal stuff is protected by the limited liability shield.
So how "limited" is limited liability? Well. there are a handful of things that can penetrate your limited liability "shield" (the legal term for this is "piercing the corporate veil"), and covering them all is well beyond the scope of this post. I will say that actual piercing is fairly rare. In most of the cases I've come across where a court has allowed a creditor to penetrate through the limited liability shield, the owners of the company were either doing something bad (like trying to use the liability shield to defraud a creditor) and/or weren't treating the company as a separate entity (I wouldn't pay my home mortgage payment out of my company account...I would transfer the money from the company account to my personal account as a distribution and then pay the mortgage out of my personal account).
That brings me to the issue that I wanted to address in this post. No matter what kind of limited liability entity you have, you are responsible for your own actions. As the name implies, there is a "limit" to the protection that "limited" liability provides. Too often I've encountered business owners who don't understand this. They think that just because they have an LLC or other limited liability entity that they are completely protected. Not so. In the two examples above, if you signed that contract personally or if you were driving that truck yourself, the limited liability shield isn't going to be of much use, because it is your own actions that are at issue, not the company's, and you are always liable for your own actions (almost always, anyway). This isn't an issue of piercing the corporate veil. The corporate veil isn't in play, because in these instances it is you, not the company, who is acting.
I definitely don't want to discourage anyone from forming a limited liability entity for their business, because there are many benefits even beyond the limited liability shield (professionalism, structure and protection if you take on a partner...I could go on...). However, I don't want you to think that just because you have a limited liability entity you are immune from liability. It's called limited liability for a reason.
Ben Bauer is a Cincinnati-based attorney who writes about things in law and life that he finds interesting.