Unit 3, Lesson 8

Liability for Businesses

AOFBusiness Economics

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Liability means being responsible for debt and legal penalties

It’s not always easy being a business owner.

• In addition to worrying about making a profit, business owners can also be liable for any debts the business accrues.

• Even worse, they might be liable for legal penalties if the company is sued.

A lawsuit can easily bankrupt a business

• A successful lawsuit against a company can cost it millions of dollars.

• While some lawsuits are a result of unethical or illegal behavior on the part of a business or its employees, others are due to mistakes or bad luck.

• Many businesses have failed because of legal judgments against them.

Different business types have different rules about liability

Ownership Type Liability Rule

Sole Proprietorship Owner is liable

Partnership All partners are equally liable, even if only one is at fault

Corporation Shareholders have liability protection

Limited Liability Company Shareholders have liability protection

Limited Liability Partnership Partners have liability protection

Liability insurance also provides protection

All smart business owners protect themselves in some way against liability. Without such protection, there is too great a chance that something unexpected might happen, and not just bankrupt the business, but also an unprotected owner or owners.