HOW MUCH PROTECTION DO I GET AS AN OWNER OF A LIMITED LIABILITY ENTITY?
Many decades ago, when business owners wished to protect themselves from personal liability in connection with the business, forming a corporation was the only way to do it. Those days are long behind us now and there are a wide variety of limited liability entities under which to organize a business. One of the motivating factors for selecting a limited liability entity for a business is to provide protection for the personal assets of the owners for liabilities created in connection with the business. This is almost always very sound advice. However, there are limits to the scope of the protection available.
Limited liability status will generally protect the business owner from the claims of creditors of the business whose claims arise under contracts. This would be lenders, trade creditors, customer claims, and the like. Of course, if any of these are personally guaranteed by a separate document, the owner would have personal exposure under that document.
The rule is different for torts that may have been committed directly by the business owner. Generally speaking, limited liability status does not protect a business owner for his or her own tortious actions. Take for example the situation where the owner of a business is driving a company vehicle and hits a pedestrian. If that business owner was found to be negligent, the fact that he was driving for the company will not protect him from personal liability. Similarly, if the owner is providing a professional service and does it in a negligent fashion, the limited liability status will not protect the individual. This is not to say that there is not significant protection given. A business owner will be protected relative to the tortious actions of the other business owners and employees.
The point of all of this is not to criticize the selection of limited liability entities for businesses. That is an important thing to do. However, it is also important that business owners have a realistic understanding of the limitations of that protection. Then they can take steps to fill in gaps with appropriate insurance coverage and other risk mitigation techniques.