When one or more people form a business, they may elect to form certain business organizations that, according to state law, benefit from limited liability. Such limited liability entities include
- the corporation
- the limited liability company (LLC)
- the limited partnership (LP)
- the limited liability partnership (LLP)
- the limited liability limited partnership (LLLP)
Limited liability means that others may only look to the business’s assets to satisfy their claims as a creditor; they generally may not go after the business owners’ personal assets. In the case of LLPs and other professional business entities, however, a creditor may look towards the business owner’s personal assets in regards to malpractice claims he personally committed (but not against malpractice acts another company owner committed).
There are instances in which a company’s limited liability may fail. For instance, if a company was used to perpetuate a fraud, or as an alter-ego of its owner(s), then the company’s limited liability veil may be pierced. Also, if a company owner signs a personal guarantee, then his personal assets are exposed if business assets are insufficient to pay a particular debt. (Moral of the story: never sign personal guarantees!)