Limited liability is a legal concept. It can mean different things depending on the context. However, generally, we use limited liability when we’re talking about making your personal assets unavailable for business debts. This means your house, car, and retirement accounts are off limits!
Limited Liability Companies
You’ll hear this term most often in limited liability companies, or LLCs. We created these as a hybrid between partnerships and corporations. Corporations already had built in limited liability protections, but partnerships did not. Therefore, having an entity that operated like a partnership, but had the protections of a corporation, made sense.
Limited Liability Partnerships
Prior to LLCs, there were LLPs. LLPs limit the liability of owners who do not take an active role in management of the business. However, creditors can always sue at least one business partner in LLPs. That makes them slightly worse than LLCs.
Contracts to Limit Liability
You can use contracts to avoid your personal liability. For example, if you’re a sole proprietor consultant, you can include a clause in your contract that limits how much you can be sued for. This isn’t perfect liability protection because there are some limitations.
Firstly, not all scenarios allow the limitation of liability. In NC, you can’t make someone waive their right to sue for damage caused by gross negligence, recklessness, or intentional misconduct. Additionally, most professionals have limits on these types of clauses.
Secondly, protection is reliant on the clause being airtight. If there’s a problem with the wording, or the contract as a whole, you could be out of luck.
Thirdly, you can’t shield yourself from liability for things outside the contract. For example, if your contract is silent on a topic, but that topic causes the damage, you might be in trouble.
Now that you see what limit liability is, it is important to know its limits.
Limited liability protection rarely protects you from things you do yourself. For example, if you break a client’s fence while painting it, you’re likely on the hook for that fence.
You only keep the protection as long as you follow the proper formalities. You must adhere to the formalities that LLCs and corporations have like annual reports.
Creditors can sometimes pierce the veil. This means that the creditors convinced the court that your company structure is illegitimate and just a façade for you personally. Most often, this means you’ve been treating the company assets like they’re your personal assets. Paying your personal rent with company money is a big no-no.