Limited Liability Protection: What and How

Limited liability protection helps to protect your assets from business debts and lawsuits. In short, limited liability protection provides an essential shield for your personal assets.

Limited liability comes from a well run Limited Liability Company (LTD). However, it’s not without vulnerability; learn how you can use this type of legal protection.

What Is Limited Liability Protection?

Limited liability protection means that if your company incurs legal liability, your personal assets stay protected.

The law does not provide impenetrable protection. In some instances, creditors can “pierce the corporate veil” and use your personal assets to satisfy a judgment. Knowing how to maintain limited liability protection can help you protect against that outcome.

Why Even Care About Limited Liability Protection?

Let’s be frank. Despite our best efforts, every business has risks. While insurance plays a role in protecting our assets, limited liability does a ton of work to protect company owners. The legal system provides essential tools to reduce risks to those who start and build businesses.

Without limited liability, owners’ assets are put at risk. If somebody gets a legal judgment, that person can ask to use your company’s owners’ assets to satisfy the judgment. That means that if a company owner owns a house and there is a business dispute, the house could be at risk.

Pay attention to limited liability protection. It gives you peace of mind.

How Do You Maintain Limited Liability Protection?

The rules on how to maintain limited liability protection depend upon the type of business entity that you are using (LTD) and what industry you are in. While we can give you the general principles here, the smart moves are to discuss your specific situation with a lawyer (join the affordableLaw Legal Program and get unlimited Consultation with a lawyer all year).

Avoid Commingling Assets: While it may be convenient to use business funds for personal expenses and vice versa, it can be a costly mistake. The legal system calls this “commingling assets.” Avoid doing it. If a court rules that assets have been commingled, it can be easier to get at a business owner’s personal assets. Take the time to set up separate accounts for your business and then use them.

Have An Operating Agreement: When setting up an LTD, you should have an operating agreement that defines all of the rights and responsibilities of members (shareholders). And then make sure that you follow the operating agreement and observe any formalities contained in it.

Complete All Necessary Filings: Finally, make sure that you complete all necessary filings (annual returns, taxes etc). This is to ensure that your company remains in good standing. Staying in good standing is key to ensuring that you maintain limited liability protection for your companies.

Again, this is not an exhaustive list of all of the things to do, but it helps to outline some of the basic principles.

What Types of Companies Offer Limited Liability Protection?

Not every company type provides the same level of protection. Some provide solid protection. Other types do not protect at all.

Typically, a properly-run Limited Liability Company (LTD) provides protection to owners. Company types such as a sole proprietorship (business name) offer no such protection.

Do you have any questions about protecting your Limited Liability? Send us an email at askalawyer@affordablelaw.ng or get actionable information on choosing the right business structure from our eBook Legal 101 for Ambitious Entrepreneurs and SMEs Use discount code ‘COVID19’ to get it FREE

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