Limited Liability

Under traditional American legal principles, an owner of a business was liable for harm caused by the business, even if the owner was not personally involved in causing that harm. Contemporary business law removes this ownership-based pathway to liability for limited liability business structures like corporations and LLCs. If you have limited liability, a plaintiff who wins a court judgment against your business cannot satisfy the judgment out of your personal assets simply because of your status as an owner of the business. Rather, the plaintiff must collect out of assets of the business only, which includes amounts you have already invested in it. Limited liability offers you -- in your capacity as an owner of the business -- protection for your personal assets if one of your co-owners or employees commits an unlawful action that injures someone, such as writing a defamatory article or post. Additionally, it protects your personal assets if someone sues your business for nonpayment of a debt (unless you gave a personal guarantee).

Certain kinds of business entity offer limited liability to owners. Members of an LLC and shareholders of a corporation generally are not liable for the debts and obligations of the business, including liability for the unlawful actions of others acting on behalf of the business. The same goes for those individuals who start and/or operate a nonprofit organization, although they are not considered "owners" or "shareholders" of the nonprofit.

Other forms of business do not offer limited liability, but rather expose their owners to personal liability for the debts and obligations of the business, including for the unlawful actions of others participating in it. Owners of sole proprietorships are personally liable for the unlawful actions of their employees committed in the scope of their employment. Partners are personally liable for the unlawful actions of their partners and employees committed in furtherance of the business. Individuals operating in an informal group may be held personally liable for the actions of others in the group if the group is deemed an informal partnership or an employer-employee relationship is found.

No form of business, however, can insulate you from personal liability for your own misconduct. If you write a defamatory article or blog post, for example, a victorious plaintiff could satisfy the judgment out of your personal assets, regardless of what type of business you adopt.

While limited liability is an attractive feature in a business structure, it often is accompanied by increased costs and hassles in terms of formation and operation of the business. You may want to weigh the benefits of limited liability against these other costs. The larger your business or nonprofit enterprise is (in terms of the number of people participating), the more attractive limited liability becomes. On the other hand, if your business or nonprofit enterprise is small -- say it involves just you creating content and publishing it online -- then limited liability is not such an important advantage because no one else is publishing material (and you're liable for your own content in any event). As a rule of thumb, the more people involved, the bigger the benefit from limited liability.

A caveat: If your business will be engaging in significant activities other than publishing material online, or if the business will take on significant debt in order to finance its operations, then the benefit of limited liability grows in significance, regardless of how many other individuals are involved.


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