You may become concerned about personal liability exposure. Perhaps your business is expanding into new territories, or maybe you may have begun producing and selling a new, somewhat unproven product. Or perhaps the company may be taking on new debts or undertaking new construction. All of these could give rise to new concerns about personal liability. You should be aware of the following:
Liability Concerns that Cannot be Resolved by Changing Entity
Personally guaranteed loans. If you or other owners have personally guaranteed loans to the business, perhaps out of necessity, you will be personally liable for the company’s debts, regardless of the entity chosen. Even if you are a corporate shareholder or an LLC member, you face liability beyond your financial investment in the company when you have personally guaranteed loans. If creditors require such personal guarantees, you need to evaluate the liability risk independent of the entity form, consulting your attorney or other advisors for guidance.
Your own negligence. If you personally have committed a negligent act, such as medical malpractice, no form of entity will protect you from personal liability for your own actions.
Law of Partnerships and Corporations More Certain than Law of LLCs or LLPs
LLCs and LLPs are recently adopted business entities. As a result, the law governing them is less developed and also less uniform than the laws governing corporations and partnerships. Accordingly, if you have an LLC or LLP, it may be more difficult to anticipate and prepare for a potential lawsuit.
Entities that Offer Greatest Personal Liability Protection
If liability exposure is a major concern, then you might choose a corporation, LLC, LLP, or limited partnership. Among these four, corporations and LLCs offer the greatest protection to active owners. LLPs shield you from individual liability for other partners’ negligence but, depending on the state, still leave you open to varying degrees of exposure for actions other than your own negligence. Limited partnerships don’t offer comparable protection to active owners. They do, however, provide liability protection to the inactive limited partners.
Alternatives to Changing Entity for Reducing Risk of Liability
You may not have to change your business entity to reduce liability exposure. For instance, insurance might offer satisfactory protection in some circumstances. Further, hold harmless agreements may enable you to shift risk to purchasers of your products or others with whom you deal.
If you have questions, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
