One of the benefits of forming a corporation or a limited liability company (LLC) (or LP, LLP, LLLP, etc.) is that they offer limited liability for their owners.
But what does "limited liability" mean?
It means that your legal liability to other people and businesses is limited (or restricted, or maxed-out) at your investment in the business. It means that if someone sues your business, they usually cannot sue you personally. They cannot get a judgment against you, put a lien on your home, garnish personal bank accounts, etc.
Limited liability is the primary benefit of forming a limited liability entity.
Some examples where liability is limited:
Charles forms a corporation, purchasing 1,000 shares for $1,000. Later, the corporation breaches a $100,000 contract, and the corporation is sued for $100,000. Charles is not personally liable, and only his initial $1,000 contribution is jeopardized. The corporation, not Charles, is liable for the full $100,000.
Mary is the sole member (owner) of an LLC. Her LLC operates a business that has a shop. A customer slips and falls, suffering $10,000 in medical bills. The customer sues Mary, but not the LLC. After she is sued, Mary points this out to the customer, who persists. At trial, Mary will not be found liable (the customer has sued the wrong party).
Aaron owns three houses, which he rents out to three different families. Aaron owns one house personally, the other two are owned by his LLC. The A/C goes out in all three houses, and the families have to live in hotels for several months. They all sue Aaron for reimbursement. None of them sue his LLC. Only one family (the one in the house owned by Aaron personally) wins at trial.
Limited liability does not apply to personal actions of the shareholders or members. If Charles had personally guaranteed the contract, he could be personally liable. If Mary was found to be negligent, she could be personally liable.
There are also ways in which limited liability can be ignored or lost. For example, if a shareholder commits fraud using the corporation, a court may ignore the limited liability benefit. Lawyers call this "piercing the veil." It is rare, it is the exception, but it is possible.
Summary: Limited liability is a shield against personal liability. It refers to the cap on legal liability for owners of the entity.
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