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Phoenix business shielded by limited liability—arrows deflect off shiny shield in legal protection scene.

What Is Limited Liability and Why It Matters for Arizona Business Owners

By Roman A. Kostenko June 29, 2025

Protecting Your Personal Assets Starts with Choosing the Right Business Structure

Starting a business is exciting—but it also comes with risk. One of the most important decisions Arizona entrepreneurs face is how to structure their business to protect their personal assets. That’s where limited liability comes in.

In this article, we’ll explain what limited liability means, how it works in Arizona, and what business owners need to know to maintain that protection and avoid personal liability.

What Is Limited Liability?

Limited liability is a legal principle that protects business owners from being personally responsible for the debts and liabilities of their business. If your business is sued or can’t pay its debts, your personal assets—like your home, car, or savings—are generally protected.

This protection is available when you form a limited liability company (LLC) or a corporation in Arizona. It does not apply to sole proprietorships or general partnerships.

LLC vs. Corporation: How They Provide Protection

LLC (Limited Liability Company)

  • Flexible management structure

  • Pass-through taxation (profits taxed on owners’ personal returns)

  • Fewer formalities than corporations

Corporation (C-Corp or S-Corp)

  • More rigid structure with directors, officers, and shareholders

  • Potential tax advantages for certain businesses

  • Stronger case law history for liability protection

What Limited Liability Does—and Doesn’t—Protect

Limited liability protects you from:

  • Business debts and obligations

  • Lawsuits against the business

  • Contract disputes involving the business

But it does not protect you from:

  • Personal guarantees on loans or leases

  • Fraud or illegal acts

  • Mixing personal and business finances

  • Failing to follow corporate formalities

How Business Owners Lose Limited Liability Protection

Courts can “pierce the corporate veil” and hold owners personally liable if the business is not properly maintained. Common mistakes include:

  • Commingling funds (using business accounts for personal expenses)

  • Undercapitalization (not funding the business adequately)

  • Failure to follow formalities (e.g., no operating agreement, no meeting minutes)

  • Fraud or misrepresentation

  • Failure to disclose the full legal name of the business entity (e.g., omitting “LLC” or “Inc.” from contracts, signage, or invoices)

  • Failure to disclose the full legal name of the business entity (e.g., omitting “LLC” or “Inc.” from contracts, signage, or invoices)

Real-Life Example: When Limited Liability Fails

Example 1: Ignoring Corporate Formalities

A Scottsdale-based entrepreneur formed an LLC for her consulting business but never opened a separate business bank account and commingled personal and business funds. When a client sued for breach of contract, the court found that she had treated the LLC as an extension of herself - not a separate entity. As a result, the court allowed the client to go after her personal assets.

Example 2: Omitting “LLC” from the Business Name

A Phoenix business owner operated under the name of his company but failed to include “LLC” in contracts, marketing materials, and invoices. When a legal dispute arose, the opposing party argued that he was operating as a sole proprietor and sought to hold him personally liable. The court allowed the case to proceed against him individually, and he faced substantial legal fees and personal financial exposure -all because of a simple but costly oversight.

How to Maintain Your Liability Shield

  • Keep personal and business finances separate

  • Use written contracts and agreements

  • Maintain proper records and meeting minutes

  • File required documents with the Arizona Corporation Commission

  • Avoid personal guarantees when possible

  • Work with an experienced Arizona business attorney

When to Consult a Business Attorney

You should seek legal guidance when:

  • Starting a new business

  • Bringing on partners or investors

  • Signing major contracts or leases

  • Facing a lawsuit or legal dispute

  • Unsure if your business is properly protected

How Arizona Legal Advisor Can Help

At Arizona Legal Advisor, we help entrepreneurs and business owners:

  • Choose the right entity structure

  • Form LLCs and corporations

  • Draft operating agreements and bylaws

  • Maintain compliance and protect limited liability

  • Resolve disputes and avoid litigation

With over 23 years of experience in Arizona business law, we’re here to help you build and protect your business the right way.

Don’t Risk Your Personal Assets—Get It Right from the Start

Limited liability is one of the most powerful tools available to Arizona business owners, but only if it’s done right. Don’t leave your personal assets exposed. Let us help you form and maintain a business entity that protects what matters most.

Contact Arizona Legal Advisor Today

Ready to form your LLC or corporation? Need help reviewing your current structure? Contact us today to schedule a consultation and protect your business—and your future.