FORTUNE Small Business:

What an LLC protects you from

An IT firm owner wonders what an LLC will and won't shield him from.

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(FORTUNE Small Business) -- Dear FSB: I'm a college student still in my undergraduate and I own a consulting IT firm in Houston and Dallas with another student. I'm getting ready to create an LLC. I remember my business law instructor telling us that LLCs cover most incidents that can happen. In my scenario and kind of work, how am I protected?

- Dennis Chow, Houston, Tex.

Dear Dennis: An LLC is a good shield. While an LLC (limited liability company), shelters its owners from most personal liability, there are exceptions, according to David S. Sokolow, distinguished senior lecturer at the University of Texas School of Law.

"In general, owners of an LLC aren't personally liable for torts," says Sokolow. "For instance, if you're an owner of a grocery store where someone slips and falls and injures their hip, the business may be liable, but you as an owner aren't liable. Or if a driver for your company is in an accident, you, personally, are shielded from liability."

That's why LLC's were created, he explains: to encourage people to invest in businesses while limiting their liability. "That's the advantage of an LLC versus a general partnership," he says. "You, personally, are immune from liability stemming from the negligence of others."

In your case, here's an example: if one of your employees spills his double cappuccino on a customer's million-dollar machine, you don't need to worry about the customer's attorney coming after your house and car to recoup expenses. Unless "your employee spilled it at your instruction," says Sokolow, "or if you knew that drink would be spilled and did nothing to stop it."

If you, personally, act negligently, the LLC shield's potency can fizzle like a coffee-soaked computer keyboard. Your liability as an owner of an IT consulting firm is no different than as an owner of another type of business, says Sokolow.

"You are still liable for your own actions if they are negligent," he says. The LLC's shield does not extend to your actions if they personally and directly injure someone, or if you intentionally do something fraudulent, illegal or reckless. To top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.