What Does It Mean to Have Liability for a Company?

Liability is something that a company is obligated or legally responsible for in a transaction where there is loss or damage.4 min read

What does it mean to have liability for a company? Liability is something that a company is obligated or legally responsible for in a transaction where there is loss or damage.

Understanding Different Types of Liability

In finance, liability is a claim against a person or organization's assets or legal obligations. Financial liabilities necessitate that assets are transferred or services are planned on specified dates.

In accounting, companies are liable for accounts and employee wages, rental payments and taxes, and both long- and short-term loans. Owners' equity is deemed a liability since the company is liable to its owners.

In law, liability is the responsibility for your actions and their consequences and is enforceable by criminal punishment or damages.

Knowing What Your Business Is Liable For

More than 80 million lawsuits are filed annually in the U.S. Though your business hopefully won't run into any legal trouble, it's a good idea to understand what your business is liable for.

As your business continues to develop and grow, you should also revisit your legal liability to make sure that it develops with your business. For example, as you hire more employees, you could face an increase in employee charges of discrimination or wrongful firing.

Here are some key liability exposure areas that should be reevaluated on a yearly basis:

  • Employment: The larger your workforce, the more you open yourself up to employee turnover and employee-initiated liability lawsuits.
  • Accidents and injuries: If, for example, a courier delivers a package to your business and trips on your front steps, your business could be sued for medical care and other costs.
  • Vehicle-related liability: If one of your employees gets in an accident while driving a company car, the company could be held liable for injuries and damages.
  • Product-related liability: If your business manufactures products, it could be held liable for accidents or injuries as a result of shoddy workmanship or improper labeling.
  • Errors and omissions liability: You could be sued if your company makes a mistake that causes a client damages. For example, you accidentally permanently delete a customer's important file from your computer system.
  • Directors/officers liability: Your board of directors could be held responsible for actions the company has taken.

Partners in a general or limited partnership and sole proprietors can be held personally liable. This means that their personal assets are at risk since they don't have an entity to protect them from liability suits. Corporations and other limited liability business entities can protect individuals from personal liability, safeguarding personal assets from being exposed in case your business experiences a loss or incident.

Tort vs. Contractual Liability

Tort liability and contractual liability are the top two types of liability to look at. Contractual liability occurs when one party agrees to do something for another party. That something could range from a service contract to a bank loan.

To protect yourself from becoming personally liable for the terms of a contract, you must always contract under the name of your business entity. Words to look for and avoid when signing a contract are "individually" or "in his/her personal capacity."