When starting a business, one of the most critical decisions you will make is choosing the right legal structure. Each business structure—be it a sole proprietorship, partnership, corporation, or limited liability company (LLC)—has distinct implications for liability. This article presents three practical examples showcasing the impact of business structure on liability through actual legal issues.
A graphic design freelancer operates as a sole proprietorship. This means they are personally liable for any debts or legal actions incurred by their business.
In this case, the freelancer signed a contract with a client, but due to a misunderstanding, failed to deliver the project on time. The client sued for damages, claiming lost revenue due to the delay.
In this situation, because the freelancer operates as a sole proprietorship, their personal assets—such as savings, home, and car—are at risk to satisfy any judgment awarded to the client. The court ruled in favor of the client, resulting in a significant financial burden on the freelancer.
Two friends opened a bakery as a general partnership. They agreed to split profits and responsibilities equally. However, one partner took a loan in the business’s name without the other’s consent and defaulted on the repayment.
When the lender pursued legal action, both partners were held jointly liable for the debt, despite only one having taken out the loan. This meant that both partners’ personal finances were impacted, including their credit scores and personal assets.
An online retail store is set up as an LLC. The owner is aware of the need for personal asset protection and has taken steps to ensure all business transactions are conducted under the LLC’s name.
However, the store faced a lawsuit from a customer who claimed that a defective product caused injury. In this case, the court upheld the LLC structure, determining that only the business assets were at risk. The owner’s personal assets, such as their home and savings, were protected from any judgment.
These examples illustrate the significant impact of business structure on liability. Choosing the appropriate structure can protect personal assets and limit financial exposure in the event of legal issues.