Value of Acquiring Limited Liability
Limited liability is a form of protection for businesses and people who enter into contracts. Essentially, when a person has limited liability there is a cap on the amount of money she would be liable for if sued. People can negotiate limited liability clauses in contracts and certain businesses---corporations and limited liability companies, for example---have built-in limited liability under the relevant state business laws.
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Limited Liability in Business
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When a person or a group of people form certain businesses, the state business laws provide that business form with limited liability. The most common structures with limited liability are corporations and limited liability companies. So long as the owners of that business respect the business form, they will only be liable for the debts and obligations of the business up to the extent of their investment. Respecting the business includes adequately funding the company, keeping business property separate from personal property and keeping good business records and accounts.
Limited Liability in Contract
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Individuals can negotiate limited liability clauses in contracts. In a contract for services, for instance, the individuals may limit the liability incurred for damage done to the property. The limited liability clause generally fixes the amount for which one party can sue the other party. According to a newsletter published by Camilleri & Clarke Associates, Inc---an independent insurance agency out of Connecticut---the clause must be reasonably drafted and the parties must have equal bargaining power for the clause to be effective.
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Business Limited Liability Example
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John Smith decides that he wants to open a pizza shop. He has over $75,000 in personal assets and has set aside an additional $50,000 to put into the business. He secures an additional $80,000 from loans and investors. Not thinking about limited liability concerns, he starts the shop on his own as a sole-proprietor. The business sinks and the creditors sue him to recover losses from the loan. The creditors can look to John's personal assets to satisfy the debts and obligations of the business because he is a sole proprietor. If John started a limited liability company, and put $50,000 into the name of the company, the creditors would generally only be able to collect the money John invested.
Contract Limited Liability Example
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John Smith entered into a contract with Hank to install an industrial oven fan in his pizza shop. The contract, which had no drafting issues or bargaining disparity problems, provided that John would limit his liability with regard to Hank for any damage caused by Hank in the installation of the fan and that any claim could not exceed $10,000. If Hank's installation goes awry and causes $15,000 worth of damage to John's pizza shop, John can only look to Hank for the $10,000 cap because of the limited liability clause.
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Comments
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tis so helpful...lyk it.
