“Draw the Law” is a weekly short post where I try to visualize a legal concept. It is designed to be helpful to the laymen and for a quick understanding. For the next several posts I will be detailing organizing and operating a business.
What is Limited Liability?
Limited liability means that a business owner’s personal assets are not on the hook for financial obligations incurred by the business. The business owner’s personal assets are “shielded” from those outstanding liabilities and in this way they are only at risk for what they invest into the business. Therefore, an owner’s house, furniture, and personal bank account or not subject to the financial liabilities of their company if it goes under.
*In some states, the law makes shareholders liable for unpaid wages of the company’s employees.
How do I get this shield?
The limited liability shield is NOT automatic. You will only receive this kind of protection from organizing a corporation, a limited liability company, or some time of limited liability partnership. The formation and organization of your company is generally handled through an attorney that knows how to create and file the proper documentation with the state you are organizing in.
One Way Around the Shield: Personal Guaranty
Many sophisticated lenders, such as banks, already understand limited liability. So when a bank lends money to small and new corporations it knows very well it cannot get its money back if the business has less assets than what the bank claims. Its typical response to this is situation is to get the owner to sign a personal guaranty or some other form of personal obligation. In this way, when the owner signs that document in their individual responsibility their personal assets can be gone after by the bank.
Despite this fact corporations and limited liability companies still remain viable options for a business owner seeking legitimacy and ways to raise funds for their endeavor. If you are interested in starting a corporation or llc, and some of the ins and outs please contact an attorney.
See you on the next draw!
*Disclaimer: This post discusses general legal issues, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction. Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.