Small Businesses, Big Protections: What Female Entrepreneurs Need to Know About Limited Liability
Many female entrepreneurs decide to start a Limited Liability Company (LLC) or a corporation because it offers limited liability protection. But what does that mean?
Limited liability means business owners are not personally responsible for their business's debts or problems. If a business causes harm or fails to pay a debt, creditors or people who were hurt can take the business's assets, like equipment, inventory, or money in business bank accounts. However, the owners' personal belongings, like cars, homes, and personal bank accounts, are protected. Usually, owners of LLCs and corporations have this type of protection.
On the other hand, unlimited liability means business owners are personally responsible for any debts or damages their business causes. In that case, personal assets can be taken to pay off debts or compensate those affected. People who operate under just a business certificate, also known as "doing business as" (d/b/a), have unlimited liability.
It's important to remember that limited liability protection isn't perfect. If an entrepreneur personally guarantees a business loan, they can be held personally responsible for it, even if the business is an LLC or corporation. Additionally, entrepreneurs can be personally liable for any harm they cause through their actions, even while acting on behalf of their LLC or corporation.
For example, Janelle owns a bodega, and Carla is her employee. One day, Carla accidentally knocks over a shelf and injures a customer, causing $30,000 in medical bills. The customer sues and wins a $40,000 judgment, which includes $10,000 for pain and suffering. If Janelle operates the bodega only with a business certificate, the injured customer could take Janelle's personal property to get the money owed.
However, if the bodega is an LLC or corporation, the customer would likely collect the $40,000 only from the cash and assets of the LLC or corporation. (The customer might also seek money from Carla, who caused the injury.) If Janelle herself knocked over the shelf, even with the bodega being an LLC or corporation, the customer could still go after Janelle's personal assets for the $40,000 judgment. That's why it's important for Janelle to have the right insurance to cover possible losses.
Lawyers can help entrepreneurs figure out if creating an LLC or corporation would benefit them. The Western New York Law Center's Small Business Legal Clinic offers free business law advice (sblc@wnylc.net | 716-828-8457).
