- Two Types of Liability Protection You Need To Know About
- September 30, 2015 | Author: James H. Gulseth
- Law Firm: JGPC Business & Corporate Law - Pleasanton Office
What kind of liability protection do you have for your business?
Do you feel confident that both your business and your personal belongings will be safe in the event of a law suit?
In today’s post, we’ll explain the difference between “inside” liability protection and “outside” liability protection.
You’ll discover some best practices that may keep you out of trouble.
What is “Inside” Liability Protection?
Inside liability concerns the business owner’s liability for things that happen within the business.
In general, you can get the same level of “inside” liability protection from a corporation or an LLC.
If someone is injured as a result of a business activity, the injured person can only get to the assets owned by the LLC or Corporation. He cannot get at a member or manager’s personal assets.
But when it comes to protection against “outside” liability you’re much better off with an LLC.
What is “Outside” Liability Protection?
Outside liability concerns the business’s liability for things that happen outside of the business.
For example, someone sues a member or a shareholder of the business in order to claim their stock so that the creditor can collect.
For that kind of liability an LLC is far superior to a corporation, because you can structure an LLC so that a creditor will either not want to – or not be able to – get that membership interest.
It’s much more difficult to do this with a corporation because of historical legal precedent. LLCs belong to the family of business entities called partnerships and corporations don’t.
So in the case of a corporation, a creditor can get a hold of a shareholder’s shares and in some cases gain control of the company.
Imagine you’re in business with a friend who turns out to be a gambler and he goes into debt. Or he has a car accident and he is sued. In either case your friend’s share of the business could be taken over by a third party. Now you’re in business with a stranger who wants to sell your business in order to realize some cash.
You can structure an LLC so this won’t happen. You can make such action very difficult or even impossible.
The LLC is tremendously flexible. It offers the potential for better liability protection because you can protect against outside liability, providing you have structured it that way. You need to draft your operating agreement in a certain fashion to make that happen.
EXECUTIVE SUMMARY: Your Liability Protection Cheat Sheet
Here’s a quick recap of what we’ve covered:
- Inside liability concerns the business owner’s liability for things that happen within the business.
- Outside liability concerns the business’s liability for things that happen outside of the business.
- Typically, an LLC will offer better “outside” liability protection than a corporation.
- Both the LLC and the corporation can provide sufficient “inside” liability protection.
As always, keep in mind that the right entity structure will depend on the specific facts surrounding your business. It is wise to consult an attorney to make the right choice.
This article was originally published on JGPC.com.