In this week’s edition of our San Diego business Law Blog series we will address the relationship between personal liability exposure for business debts and the types of business entities available to San Diego business owners.
As we discussed in our previous blogs, if you are doing business in California, there are four major business forms available to you:
Partnerships – Including General Partnerships, Limited Partnerships and Limited Liability Partnerships
Generally speaking, sole proprietorship and general partnerships do not provide the business owner(s) any protection from liability for business debts and issues arising from the operation of a business. LLCs, corporations, limited partnerships and limited liability partnerships, on the other hand, provide the business owners with protection from personal liability in a number of situations.
What is Liability?
“Liability” is a term that refers to the legal responsibility of an individual for something. As a business owner you may be legally responsible for a number of things related to the operation of your business including:
Premises Liability: If you operate your business out of a physical location and have staff or customers that visit this location, you could be held legally responsible if someone is injured at your store.
Liability for Debts: Debts are not just traditional debts like operating expenses, purchasing goods or paying employees. If your business is sued and found legally responsible for misconduct, injury to another person or a breach of contract, those obligations are also considered business debts.
Sole Proprietorships – When doing business as a sole proprietorship you are personally responsible for all of the income and debt associated with the business. This means that there is no personal protection from debt collection if the business becomes insolvent and cannot pay its debts.
General Partnerships – Like sole proprietorships, general partnerships do not provide protection from personal liability for business debts. If the business becomes insolvent each of the partners is legally responsible for the outstanding business debts.
Limited Partnerships – Unlike general partners, limited partners are not personally liable for the debts and obligations of the limited partnership; rather, they are liable only to the extent of their respective capital contributions. Bear in mind, however, that a limited partner may be required to return distributions received from the limited partnership at a time when the limited partnership does not have sufficient assets to satisfy its liabilities.
Limited Liability Partnerships – Like in the limited partnership, the partners of a limited liability partnership are not generally liable for the obligations of the partnership or the other partners. There are, however, certain exceptions to this protection: (i) liabilities incurred when the partnership is not an LLP; (ii) liability imposed by agreement; (iii) liability for a partner’s own tortious conduct; (iv) liability for errors and omissions in rendering legal advice (for attorneys); (v) and liability as guarantor, which occurs when a partner personally guarantees a debt.
Corporations and LLCs – Corporations and LLCs offer business owners protection from personal liability. Business owners who are operating as corporations or LLCs are generally protected from personal liability but that protection can be forfeited in a number of situations including using a personal loan or credit card for business debts, signing a personal guarantee or offering property as collateral.
Employees: Having employees can expose you to liability in a number of different scenarios. Courts have held employers responsible for their employees’ actions in a number of scenarios, including when their employees have injured coworkers, customers and even people completely unrelated to the business. Employers also have to be aware of and avoid situations where their employees may allege misconduct on behalf of another employee or the business owner. From hiring to firing and everything in between, employees can cause business owners some major headaches.
Protecting Yourself as a San Diego Business Owner
Operating your business as a corporation, LLC, limited partnership or limited liability partnership may provide a certain level of protection from personal liability if something goes wrong within your business. Regardless of the business form you select, as an experienced San Diego business attorney I’d encourage you to consider obtaining insurance if you have a physical location for your business and/or general commercial liability insurance if you want to protect yourself from the financial impact of certain legal actions.
California law requires that I inform you that this is an informational blog post only and is not intended to, nor does it provide legal advice. This blog post is for advertising purposes only and is an advertisement. Please consult an attorney prior to making any legal decisions. Ortega Business Law Firm, APC is generally licensed to practice law only in the State of California. The ability to access this blog post or its website in another jurisdiction does not constitute the practice of law outside of California or a representation that this office is licensed to practice in any other jurisdiction.
All information and material contained within this post is believed to be accurate. Nonetheless, it should not be considered legal advice on any particular topic. All fact patterns are potentially different and you should not act on information contained in the website without seeking advice from a legal professional specific to your particular situation.