Does an LLC provide equal liability protection as an S or C corp?


1

My early stage startup is at the point where we need to form a corporate entity. I've read a lot on the web and here about the advantages and disadvantages of the LLC vs C-Corp (and the tax accounting classification S-Corp)

We're not likely to seek outside investors (with the possibly exception of some Friends and Family type of seed money) so the LLC seems like a logical choice.

However, one of the sites I read implied that liability protection of a C corp is much stronger than that of an LLC. Our product, a game, is played outdoors in the real world. Clearly somebody could get injured, say crossing the street, and sue us. So I want the liability protections to be strong.

Is an LLC a bad choice given our liability needs?

Thanks!

LLC Incorporation Liability Corporation

asked Jan 12 '12 at 02:27
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Paul Cezanne
649 points

2 Answers


3

Just asked my lawyer: protection against personal liability in injury lawsuits is the same - you're not personally liable for faulty products as long as you're incorporated. The difference is in personal protection against financial wrongdoings by the company (i.e. courts can waive protection in certain cases).

answered Jan 12 '12 at 03:17
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Dnbrv
1,963 points
  • I'm curious about this. Can you clarify what you mean by "financial protection"? See my answer for my interpretation of that. – Zuly Gonzalez 8 years ago
  • Brain malfunction when translating from legalese & multitasking. Thanks for the catch! I wonder why others upvoted without commenting. – Dnbrv 8 years ago
  • Thanks for the clarification. – Zuly Gonzalez 8 years ago

2

Well, I am not a lawyer, but my understanding is that the liability protection is very similar.

I'm not sure what @dnbrv means by The difference is in financial protection. If that is in reference to business debts, LLCs will also provide you with limited protection against business debts. Maybe the difference is in what the cap is?

In real life things get tricky, for both LLCs and Corps. Since you are starting a new company with no credit history, anyone you get a loan from will likely ask you to personally guarantee the loan. That means that you are personally on the hook for the loan, not the company. This includes things like credit cards and office space. Note that this will apply whether you form an LLC or a Corp.

If you don't plan on seeking outside investors, and are concerned about injuries and lawsuits, my suggestion is to form an LLC (because it is simpler and more flexible) and then get liability insurance on top of that. The reason I suggest this is because liability protection seems to be important in your case, so you'll want to get it even if you form a Corporation.

Nolo has a book that discusses the differences between an LLC and a Corporation. You may want to check it out. Tip: Check your local library first.

Also, search our site for liability insurance. You may find some useful information. For example:

How do I determine how much Liability Insurance I need? Should I establish an S-Corp or is Liability Insurance enough to Protect myself from Personal Liability? Is it worthwhile to get business insurance?

answered Jan 12 '12 at 05:19
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Zuly Gonzalez
9,194 points

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