What is limited liability, and do I need it? The three factors to help you decide.
Limited liability is basically a shield that prevents business creditors from going after your personal assets. In plain language, that means if someone sues your business for something, they can’t go after things like your house, your car, or your personal bank account; they can only go after whatever assets belong to the business.
In California, there are multiple entity types that provide limited liability. The two most common limited liability entities for small businesses are Limited Liability Companies (LLCs) and C Corporations. (More articles on these topics forthcoming!)
When we do an analysis with our clients about whether limited liability would be a good idea for them, we look at three factors:
- the potential risk of lawsuit,
- how important it is to you to protect your personal assets, and
- your tolerance for risk.
Potential Risk. The riskier your business is, the higher the likelihood of lawsuit, and therefore the greater need for limited liability. A restaurant, for example, is going to have a much higher risk of legal issue than a freelancing web designer working from home. Factors like a brick and mortar store, having employees, and inherently risky goods or services (such as those that require physical labor, heavy machinery, lots of driving, serving food, or working with children) will have a greater need for limited liability.
Personal Assets. On the other side of this analysis is your personal assets. The more value your personal assets have, the greater the need to protect them. This becomes an even greater risk when your property is co-owned or is community property, such as a house or bank account that you share with your spouse. You don’t want to end up in a position where you’re faced with a business lawsuit and your family home becomes threatened.
Risk Tolerance. The final factor is your personal comfort with risk. Some business owners are comfortable with high personal assets and high risk. Some business owners want limited liability even if they have minimal assets and low risk. As lawyers who have seen the worst, we are as risk averse as we can be, so we almost always recommend limited liability if it’s an option because there is no such thing as a no-risk company. But ultimately, the decision comes down to what you think is best for you, your loved ones, and your business.
Choosing your entity type is one of the biggest business decisions you’ll ever have to make, and can have dramatic effects on the future of your business. It’s always a good idea to talk to a business lawyer before making this important decision. If you have questions about whether limited liability is a good choice for you, contact us or book a consultation today.
Want to set up an LLC? Check out our article about How to Form an LLC in 5 Steps.