“Limited Liability” is defined as “liability of a company’s owners for nothing more than the capital they have invested in the business.”
Limited liability is how you protect your personal possessions from being used to pay for any debts, judgments, or other financial obligations created by your entity. Limited Liability is discussed so much in the startup world because it is one of the most important factors you should consider when choosing an entity (such as a Limited Liability Company or Corporation). A business entity that offers limited liability, limits the liability of business owners to their investment in the company. That means, if you start a business that offers limited liability, creditors cannot go after your personal assets (e.g. a savings account, car, or house) to collect on any money owed by the business. This is true of loans (unless there is a personal guarantee), accounts of the business, and lawsuits. If your liability is limited, creditors can only collect money or assets inside the business.
This matters both in the success and failure of a business. If your business is successful, it can become a target for lawsuits. Many successful businesses have been dismantled by one lawsuit that bleeds the business dry. If the business goes under because of the lawsuit, creditors are out of luck because creditors cannot take your personal assets into account to satisfy any business debt they are seeking to collect. Often, a business can run out of money during a lawsuit before any judgment happens because of the cost of litigation (even if there is insurance to cover some of the burden). That means if your business struggles for a time after a lawsuit that cost more money than you anticipated, the creditors cannot look to your personal assets (or other sources of income) to satisfy the judgment they won. Your liability for the judgment of the lawsuit is limited to the entity. That means, a struggling business does not necessarily create a struggling owner. Your business may have a difficult time satisfying some of its debts, but you do not experience the same struggle personally because you properly limited your liability in each of your business ventures.
The protection of limited liability is also important if a business fails. Dissolution of a failed business is like probate. The assets of the business are divided to pay off any existing creditors (or as much as they can) and the owners continue on with their lives. That means if your business fails and you are forced to shut down your business, the creditors go with the business. You will have to satisfy your creditors before you get any money out of your business, but creditors cannot go after you personally for debts incurred in the business.
The concept of limited liability is how successful people keep their money. It is important that you take the proper steps to limit your liability from the start of any business venture. If you take those steps up front and your business fails, you have lost your investment, but not everything you have.
Limited liability may be even more important for those who are building their first startup. Those who invest their life savings, their blood, sweat, and tears into a startup. This is important because you will earn a living from your business and it is important to keep the money you earn separate from the business, so you do not lose it all in a lawsuit or if your startup does not make it.