Limited Personal Liability Definition

What is limited personal liability?

The limited personal liability business definition refers to when a business owner or investor’s liability is limited to the amount of their investment in the business. In a limited liability situation, the business owner is treated as a separate entity from the business entity. So if the business incurs a debt, only the business entity is responsible. 

When a business with limited personal liability owes money to a customer, the customer can only get their money back from the business. Customers can’t go after the owner’s accounts.

Only certain business structures offer limited personal liability to their owners. These businesses include limited liability companies (LLCs), corporations, and limited partnerships. Conversely, in sole proprietorships and general partnerships, each owner is personally liable for the business’s obligations. We can help you form a limited liability entity, such as an LLC or Corporation, with our Business Formation services.

Limited Personal Liability Benefits

With limited personal liability, an individual’s assets are protected even if someone sues their business. Customers or creditors can’t sue the owner if the business doesn’t pay a loan or doesn’t meet its obligations. Limited personal liability advantages include the fact that a business owner can invest in a company knowing that a creditor can’t touch the individual’s assets if someone sues the company.  

Limited Personal Liability Considerations

Many believe that limited personal liability is the same as no personal liability. This is incorrect because there are instances where the owner of an LLC or Corporation may be personally liable. That’s one of the limited personal liability disadvantages: it’s not absolute. For example, if the LLC owner personally guarantees a loan for the LLC, they would be individually liable if the LLC defaults.

The owner of an LLC or corporation could also be personally liable if they commingle funds (mixing their personal and business funds), use business expenses for personal expenses, or engage in fraudulent activity. A court or a creditor may be able to get around the limited liability of a corporation to hold an owner personally responsible for these problematic activities. This is referred to as “piercing the corporate veil.” 

Limited Personal Liability Examples 

Let’s say that you formed an LLC with limited personal liability for owners, and your purpose is to sell candy. The LLC rented a storefront. You invested money into the LLC to pay for start-up expenses. Unfortunately, your LLC hasn’t sold much candy and can’t pay its rent. If the landlord sued the LLC for unpaid rent, the landlord could get a judgment against the LLC. This means that the landlord could collect against the LLC’s assets, including whatever you invested in the LLC. Yet, the landlord can’t go after your personal assets for the LLC’s unpaid rent. 

Summary: Limited Personal Liability Definition

Limited personal liability means that a business owner’s assets are protected from debts and liabilities that the business may incur, except in limited circumstances. Only specific business structures offer limited personal liability to their owners.