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August 20, 2018

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Does My Business Really Need Limited Liability?



The short answer, as an attorney, is yes, your business does need limited liability. Why? Because if we tell you no and you incur personal liability later on, we could be to blame. However, this question deserves additional explanation. The reason why choosing to protect your business with limited liability is a good idea is because this makes the owners of the business not liable for the debts incurred by the business. For example, if your business faces a contract dispute or employment lawsuit, you, as the owner, would not be liable for those debts. If the business cannot pay the debts, it will dissolve.


Individual Liability for Misdeeds


With that said, the limitation of liability will only extend to the misdeeds of the company itself. If the company becomes a party to a contract and then breaches that contract, the company may be the liable party. However, if the owner is responsible for some type of error, the company could be responsible through vicarious liability, but that does not protect the individual from liability. Many times, the attorney for the plaintiff will try to collect the judgment from the company because it is likely more able to pay.


If an individual creates a limited liability company to protect him or herself, but ends of being responsible for the action, the limited liability will do that person no good. The owner can dissolve the business, but will still have to pay for the action. For example, a mechanic creates a limited liability, but is negligent in fixing the brakes on someone’s car and the customer later has an accident and is injured. The mechanic could still be held liable separately from the business liability.


Limitation of Liability


The limitation of liability will often require some types of formalities to prove that the individual is not using the company to try to shield him or her from liability. The court will often look to see if the company is adequately insured and capitalized to make this determination. If the court finds that the company was not adequately capitalized during its inception, or used in an impermissible manner, the court will likely attach liability to the owners and not the company.


In short, business owners will be protected from liability in instances in which they were not personally responsible for the legal action and the company followed all of the required formalities to maintain limited liability. In California, limited liability entities are required to maintain a minimum annual franchise tax of $800. The only businesses not subject to this are corporations during their first year of business. Companies must also file paperwork with the Secretary of State and pay filing fees. For most businesses, however, the protection far outweighs the cost and hassle of these requirements.


Contact an Experienced Business Law Attorney Today


If you are not sure whether your company needs limited liability, you need to speak with the attorneys at Verhagen Bennet, LLP. Like other business decisions, it is important to understand the benefits and costs of how the decision will affect your business. Schedule a consultation with us today and let us help you make that determination.

© 2019 Verhagen Bennett LLP — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.


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