{"id":292,"date":"2011-02-17T16:33:00","date_gmt":"2011-02-17T16:33:00","guid":{"rendered":"http:\/\/www.michaelsmithlaw.com\/blog\/2011\/02\/just-what-is-a-limited-liabili-4.html"},"modified":"2023-11-28T13:42:51","modified_gmt":"2023-11-28T18:42:51","slug":"just-what-is-a-limited-liabili-4","status":"publish","type":"post","link":"https:\/\/www.hpindiana.law\/business-blog\/just-what-is-a-limited-liabili-4\/","title":{"rendered":"Just what IS a limited liability company? Part 5. It has a liability shield."},"content":{"rendered":"

[This is the fifth post in a seven-part series discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here’s the entire list.<\/p>\n

Part 1. Background on sole proprietorships.<\/a>
\nPart 2. Background on partnerships.<\/a>
\nPart 3. Background on corporations.<\/a>
\nPart 4. LLCs are distinct legal entities, separate from their owners.<\/a>
\nPart 5. A limited liability company’s owners are not liable for the LLC’s obligations.<\/a>
\nPart 6. Options for an LLC’s management structure.<\/a>
\nPart 7. Options for an LLC’s tax treatment.<\/a>]<\/p>\n

The last entry <\/a>in this series explained that a limited liability company<\/a> has its own legal identity, separate from its members. A related concept is that a limited liability company has a liability shield, sometimes called a corporate veil, between itself and its members. That means that the members of a limited liability company are not liable for the debts or obligations of the LLC itself, just as the shareholders of a corporation <\/a>are not liable for the debts or obligations of the corporation itself.<\/p>\n

To see how that works, let’s imagine that you and two of your good friends, Jack and Jill, decide to buy a bicycle shop. You consult an attorney, and he recommends that you create a limited liability company to buy the shop. He writes an operating agreement<\/a> for you, which all three of you sign, files articles of organization<\/a> in the Indiana Secretary of State<\/a>‘s office, and takes care of other details such as obtaining an Employer Identification Number<\/a> . At that point you are the proud owners of a limited liability company Three Good Friends, LLC . (By the way, there is no such LLC in Indiana. I know that because I ran a search on the Secretary of State’s website.) The purpose of the LLC is to buy and run a bicycle shop. To raise the money, you and Jill each drain your savings accounts, and Jack mortgages his house to the hilt. All three of you put the money (called your initial capital contributions<\/a>) into the LLC, and with that money the LLC buys a bicycle shop, which you rename as Three Good Friends Bicycle Emporium. The LLC’s lawyer files a certificate of assumed business name showing that Three Good Friends, LLC is now doing business as Three Good Friends Bicycle Emporium.<\/p>\n

While you’re working in the shop one afternoon, a delivery truck arrives. A LARGE <\/strong>delivery truck. The driver comes in and asks where you’d like to put the 700 bicycles you ordered. (I don’t know if a single truck can actually hold 700 bicycles, but cut me some slack and go with me on this.) You tell him there must be some mistake because you ordered only 7 bicycles. After a frantic search through your computer files, you realize that a mistake was indeed made — and that you’re the one who made it. You really did order 700 bicycles. And they’re expensive bicycles. VERY <\/strong>expensive. You make a few phone calls and find out that the bicycles cannot be returned and that the shop will have to pay for them. You also know that there’s not nearly enough money in the LLC’s bank account to pay for the bicycles.<\/p>\n

You tell Jack and Jill what happened, expecting them to be furious — and Jack is. As Jack often does, he imagines the worst. He says that the bicycle manufacturer is going to sue not only the shop but all three of you. He worries that not only will the three of you lose the business, but that he’ll lose his house, which he mortgaged to the hilt to come up with the money for the business. Jill, being her characteristically calm self, tells Jack not to worry. The reason that they set up a limited liability company was so that none of the three good friends can be held liable for the debts of Three Good Friends Bicycle Emporium. She tells Jack that even if the LLC goes bankrupt, his house is safe from the bicycle manufacturer. Is Jill right?
\n Continue reading \u203a<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

[This is the fifth post in a seven-part series discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here’s the entire list. Part 1. Background on sole proprietorships. Part 2. Background on partnerships. Part 3. Background on corporations. Part 4. LLCs are distinct legal […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12,18],"tags":[],"class_list":["post-292","post","type-post","status-publish","format-standard","hentry","category-limited-liability-companies","category-small-businesses"],"yoast_head":"\nJust what IS a limited liability company? Part 5. 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