{"id":4900,"date":"2021-12-01T12:18:41","date_gmt":"2021-12-01T17:18:41","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/what-does-limited-liability-mean.html"},"modified":"2025-11-06T13:19:00","modified_gmt":"2025-11-06T18:19:00","slug":"what-does-limited-liability-mean","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/what-does-limited-liability-mean.html","title":{"rendered":"What Does Limited Liability Mean?"},"content":{"rendered":"\n
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What Does Limited Liability Mean?<\/h1>\n\n
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\n By Kimberly Lekman, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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Limited liability is a legal protection afforded by a separate business entity<\/span>, such as a corporation, limited liability company<\/span>, or limited liability partnership<\/span>. It means the personal liability<\/span> of the owner is limited to the amount they invested in the company and their personal assets<\/span> are shielded from business debts and obligations.<\/p>\n\n <\/div>\n\n\n\n

Limited liability is an advantage of certain business structures<\/span>. Through limited liability, investors are only liable for a company\u2019s obligations up to the amount they invested in the company. This means their personal assets<\/span> have protection from the business\u2019s liabilities. With limited liability, your business creditors cannot go after your home, car, personal accounts, or other assets to cover your business\u2019s debts.<\/p>\n

All businesses have a\u00a0legal structure<\/span><\/a>, but not all business owners<\/span>\u00a0have liability protection. A legal structure<\/span> is sometimes called a\u00a0business structure<\/span>, or a form of business ownership. It is the type of <\/span>business<\/span> entity<\/span>, or legal entity<\/span>, you create.<\/p>\n

A common legal structure<\/span> is the\u00a0sole proprietorship<\/span><\/a>. If you own your business by yourself, pay your business taxes through your personal tax return<\/span>, and have no business partners, you probably have a sole proprietorship<\/span>. This legal structure<\/span> does not offer limited liability protection<\/span>. So, you can be open to unlimited liability<\/span> for your company\u2019s debts<\/span> as a sole proprietor. If your sole proprietorship<\/span> becomes\u00a0insolvent<\/a>\u00a0(bankrupt), then your home, personal accounts, or other personal assets<\/span> could be at risk.<\/p>\n

To protect your personal property<\/span> from your business liabilities, you should create a limited liability legal structure<\/span> such as a limited liability company<\/span><\/a> (LLC), a limited liability partnership<\/span>\u00a0(LLP<\/span>), or a corporation.<\/p>\n

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Limited Liability in LLCs, LLPs<\/span>, and Corporations<\/h2>\n

An LLC\u00a0is a legal structure<\/span> that has similarities to partnerships and corporations. Like a corporation, an LLC<\/a> offers its owners\u00a0limited liability protection<\/span>. Like a partnership, it has a flexible structure. Many small businesses<\/span> choose LLCs because they\u00a0are simpler and easier to set up than corporations. But they still offer limited liability protection<\/span>.<\/p>\n

A\u00a0corporation<\/a>\u00a0is a more complex legal structure<\/span> with extra layers of rules and regulations. Most small businesses<\/span> are better suited by the simpler LLC<\/a> structure. But you may need to think about incorporation if you want to issue stocks or have a large number of investors.<\/p>\n

An LLP<\/span>\u00a0is a special type of partnership. It offers limited liability for all members, like an LLC. But this limitation can vary by state. Some state laws give limited liability to LLP<\/span> partners for all business obligations. In other states, partners only receive limited liability for the other partners\u2019\u00a0negligence<\/a>. The ease of adding and releasing members from an LLP<\/span> is an added benefit. This makes it attractive to business owners<\/span> in licensed industries.<\/p>\n

LLPs<\/span> are most commonly used in professions like accounting, architecture, medicine, and law. In fact, some states only allow LLPs<\/span> for these types of licensed professions.<\/p>\n

Choosing a Limited Liability Structure<\/h2>\n

Aside from liability protection, you might consider tax issues when\u00a0choosing a legal structure<\/span><\/a>\u00a0for your business.<\/p>\n

In partnerships, partners pay business taxes on the company\u2019s profits through their individual income <\/span>tax<\/span> returns<\/span>. This is called \u201cpass-through\u201d taxation.\u00a0Partnership taxes<\/a>\u00a0are sometimes preferable to corporate taxes. Corporations can be subject to so-called \u201cdouble taxation.” This is when the corporation pays taxes on its profits and stockholders pay taxes on their dividends too.<\/p>\n

Members of an LLC may find the\u00a0structure offers tax advantages.\u00a0LLC taxation<\/a>\u00a0depends on whether you have a single-member<\/span> or multi-member LLC. With a single-member<\/span> LLC, the IRS<\/span> will tax your LLC as a sole proprietorship<\/span>. This means that you will pay taxes on your company\u2019s profits through your personal <\/span>income<\/span> tax<\/span> return<\/span>. For multi-member LLCs, LLC owners<\/span> can decide whether they would prefer to pay taxes as a corporation or as a partnership.<\/p>\n

How Do I Form a Limited Liability Legal Structure<\/span>?<\/h2>\n

Once you have decided on a company structure<\/span> for your business, you should visit your secretary of state<\/span>\u2019s website. There, you can find out how and where to\u00a0file the official paperwork<\/a>.<\/p>\n

You need a business name<\/span> that is available for use in your state. You can search online with your secretary of state<\/span>\u2019s office for name availability.<\/p>\n

As an example, forming an LLC <\/a>is a relatively easy task. You can usually complete the process online. You will need to submit articles of organization<\/span> or a certificate of formation<\/span> and pay a modest filing fee. The\u00a0articles of organization<\/span><\/a>\u00a0should contain basic information about your business. This includes:<\/p>\n