Limited liability protects your personal assets from your business liability. A limited liability company is easier to set up than a corporation but offers the owners legal protection similar to what corporate stockholders have. Such a company can be a limited liability corporation or limited liability partnership.


Liability is money owed. "Limited liability" refers to a business structure that limits the members' personal liability for the company's actions. Creditors and others suing the business are limited to collecting from company assets; they cannot go after the members' personal assets. LLPs offer further liability protection by restricting liability not just to the business but to a partner in the company.


Corporations, LLCs and LLPs are the business structures that have rules limiting the liability of members. A limited liability company can have an unlimited number of members. In most states, even an individual can own an LLC. Some businesses, including insurance companies and banks, can become a corporation but not an LLC or LLP.

Piercing the Veil

Limited liability is not absolute. "Piercing the veil" of legal protection means members' personal assets are exposed to liability. In a lawsuit, this can happen if a creditor proves the members intentionally underfunded the business to defraud creditors, did not adequately separate personal and business financial affairs, did not keep required records or did not hold required meetings. The veil can also be pierced if a business fails to maintain its standing as a limited liability company. Most states will dissolve an LLC if it fails to file state-mandated reports or pay required fees.


State laws govern limited liability companies for tax purposes. The federal government does not recognize an LLC or LLP as a separate tax entity. Such companies must file taxes with the Internal Revenue Service as a corporation, partnership or sole proprietorship. LLCs must pay state taxes, but other state laws governing these companies may vary. Companies may also be required to file county or city taxes.


LLCs require less paperwork to set up and run than corporations. They also offer more flexibility in dividing profits than corporations do. A disadvantage is if a member leaves, an LLC must be dissolved. You can reform the company with the remaining members, but to avoid this inconvenience, set up provisions for this scenario when you form the company. Another disadvantage is that the IRS views limited liability company members as self-employed, so members must pay self-employment tax. This consists of the employee and employer parts of the Social Security and Medicare taxes.

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