The Concept of Limited Personal Liability: An Overview
Limited personal liability is a business concept whereby business owners and partners are shielded from personal financial responsibility for their business debts and liabilities. When a business is structured and legally certified of limited liability status (LLC, LLP, or SPV), the personal assets of the business owner are not used when settling business debts, liabilities, or obligations. Thus, limited personal liability means that an individual’s personal assets cannot be seized by creditors in case of financial distress or insolvency. Someone with a limited personal liability has a greater sense of security that their personal finances and assets are fully protected from business debt.
Implications of Limited Personal Liability for Business Owners
For business owners, limited personal liability is one of the most beneficial strategies to manage the risks associated with running a business. This prevents the owner from having to reimburse the business’s creditors using their personal wealth or assets. Any legal claims related to the business will be filed against the business entity – not the business owners. In addition, a business owner will enjoy peace of mind as they don’t need to worry about their personal assets or finances being seized in the case of financial distress.
Legal Structures Offering Limited Personal Liability
The legal structure of a business is very important to protect the business owners from personal liability. A few of the legal business entities offering limited personal liability protection are:
- Corporation – a business that is set up as a separate entity with its own legal and tax liabilities.
- Limited Liability Company (LLC) – a type of corporation that offers flexibility in tax and financial management.
- Limited Partnership (LP) – where the owners have limited liability and unlimited liability for the general partner.
- Special Purpose Vehicle (SPV) – a legal entity created to isolate the asset, risks, and obligations of a single project.