Where Does Liability Start?
Liability. We all understand the word, but what does it mean when applied to starting up a new business? We all have the same desire. That is, if something goes wrong in the operation of our new business we don’t want to be personally liable for whatever the mistake was. But is there a way to avoid liability when forming a business? Well, while it is not possible to avoid all liability, it is very possible in most instances to avoid the lion’s share of it. Reducing liability starts in the very beginning of the formation of the business, and can be done relatively simply by establishing a corporate structure that supports the business that you are forming. The fact is, without forming an LLC, incorporating, or structuring your business in some other legally recognizable form, you could be taking on massive, personal liability for any business activity that you engage in.
You might ask, “what does it mean to be personally liable.” In other words, how far does personal liability go? The very frightening fact is that, without proper business structure, your home, your finances, and any other assets that you hold could be reached in a judgment by a court for activity that occurred as a result of operating your business. And, the results of such a judgment might well have been easily avoided by spending a little time deciding the type of business structure appropriate for your business and a little money in doing so.
Reducing Personal Liability in the Early Days of Your Business
An LLC is probably the easiest way to form a corporate structure that provides basic liability protection for the individual behind the business. LLC’s in Massachusetts, allow a new business or even a previously operating business, to adopt a formal corporate structure without a lot of extra leg work. It is a matter of choosing a legal name for your business, filing the necessary documents with the Secretary of State, and paying the fee. Additionally, it is wise to invest in an operating agreement that defines each member’s capital contributions to the business, member ownership interests, the ownership of the business, whether a right of first refusal may apply to members of the LLC, and many other matters. Spelling these details out in an operating agreement aids a new business develop a road map that is not only practical for the operation of the business, but is helpful should a matter appear before a court.
Incorporation of a business is another way to move liability away from the individual and towards the company. Remember, that in law, a company is a stand-alone, separate legal entity. A business that is properly incorporated (or structured as an LLC or other legal form) is like a person in the eyes of the law. In other words, the damages occurring to a defendant that result from mistakes or accidents that may become the center of a lawsuit are more likely to be applied to the business, not to the owner of the business, if the business follows a legally recognized structure. Because personal liability must be avoided at all costs, it is critical that any new or existing business be structured under the appropriate business structure to achieve this liability limiting purpose. Lawyers are trained in understanding how to minimize liability. For this reason, having a liability protection plan for your business is as important as having, say, employees.
Remember, however, that not all liability can be avoided. One basic rule in law is that one cannot escape one’s own negligence. This rule means that if you do something as a business owner that is highly irregular, illegal, or goes against a basic duty owed to your customers or others, you may be personally liable for that conduct and no form of business structure would protect you.
Want to learn more about different types of corporate structure? Read some of my articles on the subject:
“Forming an LLC…”
“LLC for Your New Business?“
“Incorporating a Business in Massachusetts...”
“Why Use a DBA for my Massachusetts Business?“
DISCLAIMER:
The information provided in the pages and posts of this website are for general informational purposes only. The information presented on this site is not legal advice, and no attorney-client relationship is formed by the use of this site.
