In business, most everyone has heard of a “limited liability company” or a corporation, which is a “limited liability entity” under State law. But, what does the term “limited liability” actually mean?
“Limited liability” does NOT mean NO liability. But most people assume that when they file their entity application with the Secretary of State and get this sheet of paper, they are automatically protected from any personal liability in a lawsuit brought against the company.
Unfortunately, this isn’t true. When you use the State application process, you are getting the bare minimum of liability protection. People don’t realize that they can put provisions in their governing documents giving them more liability protection than the default rules. But they should definitely be in writing to prove they exist.
Now, even after you form the limited liability entity, you are still not adequately protected – you actually need to follow the rules of the entity. Those rules can either be the default rules under State law or those you put in your governing documents – the Certificate of Formation and the limited liability company agreement (provided they are consistent with State law).
You can’t just give lip service to those rules either – you need to actually do the things you say you will in your documents. And, write down all of the business decisions you make – if you don’t write them down, it’s very hard to prove that you actually did them.
The limits on liability exposure are not set in stone. They only go as far as the effort the business owner puts in to comply with the law and the rules the owner establishes. So, to get the best out of your limited liability entity, contact my office to schedule an appointment to review your structure and fix it to maximize your liability protection.