The Importance of Limited Liability for Business Owners or “Why A Net Might Be A Plus For Tightrope Walkers”

This month marks the 30th anniversary of the annual South by Southwest Conference & Festival (or “SXSW”, if you’re into the whole brevity thing). As usual, Austin’s streets have been flooded with visitors. One of them is Nick Denton (no relation to this law firm or its members).  In 2003, inspired in part by SXSW, Mr. Denton founded Blogwire, Inc.. The company later became Gawker Media LLC and eventually owned a number of notable websites (including Deadspin, Lifehacker, Gizmodo, Jezebel, and, of course its flagship, Gawker) that over the lifespan of the company published more than one million stories. By 2015, Gawker (the website) alone had over 23 million visits per month.

 Then, last year the company lost a lawsuit for $140 million and declared bankruptcy.

 In an interview published in Ars Technica this week, the Gawker Media founder noted, “The legal process is convoluted and extremely expensive. And you don’t get your costs back. Even if you win, you lose. We were running about a million dollars a month at one point, because of legal costs.”

 As Mr. Denton’s comments reflect, business ownership can be extremely risky. Thus, laws in every state allow for the formation of business entities that limit the personal liability of business owners, officers, and managers. Indeed, some scholars consider limited liability to be a subsidy that shifts some of the risk of operating a business from the owners to creditors. The theory is that, should a company fail because of lawsuit or other debt, the personal assets of the company owners and investors will be protected, with creditors bearing the cost of the remaining burden. It’s thought that limited liability encourages business ownership and new ventures, from which a variety of benefits flow to the economy and society as a whole.

 Nevertheless, sole proprietorships and general partnerships, which provide little to no protection for their owners’ personal assets, remain two of the most common business structures. They require very little effort or expense to form and operate and are, understandably, used by aspiring entrepreneurs who want to start making money ASAP, and with as little cost as possible. However, business owners using these structures could be compared to tightrope walkers walking along a tight rope without a net. Under such circumstances, debts or lawsuits may be catastrophic, not only to the company, but to the owner(s) as well.

In the aforementioned Ars Technica article and a recently-published Fortune article, Denton appeared reflective when contemplating his coming career moves. One can imagine that he might be less reflective if he were personally on the hook for his company’s legal costs and recent court loss.

If you are a business owner and contemplating whether you should pay for the extra expense of forming a limited liability business entity, ask yourself: If you were on a tightrope, would you want to have a net?

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