Inside Liabilities are the claims that arise from a business’s asset or activities. It’s a risk that is associated with the ongoing business transactions, debts, or obligations of a company. Outside liabilities are the opposite; any liabilities that emerge from outside the course of your business.
These can be from your personal life, also known as personal liability. Most entities have been formed in order to protect themselves against inside liability.
Corporations provide a corporate shield that protects the shareholders from the debts and obligations of a business entity.
To understand Inside Liabilities better, let’s have a look at some of the examples:
Let’s assume you are the director of a Limited Liability Company. Due to some unseen circumstances, you find yourself breaching a contract. This is an inside liability.
But since a company is a separate business entity, you and other stakeholders are protected from this liability as this liability is confined to the business.
The owners and director’s assets are not at risk in this case. The way the company is protecting the stakeholders from the inside liability, similarly any outside liabilities are separate from the company.
Let’s take a look at another example using the same LLC scenario. Now there’s a huge debt the company is under. The creditors cannot come after the assets of the directors of the company or the assets of the shareholders.
These assets will not be risked just to pay back the debts of the business. Now let’s assume that a customer sues your business for any unintentional harm done on your part.
This will be an inside liability and no one else other than the business entity will be obligated to pay from their personal assets.
Basically so far we’ve established that limited liability companies take the most advantage of inside liabilities.
Now let’s suppose that a husband and wife form a Family Savings LLC. Both have an interest of 50% in the company. All of their financial assets such as mutual funds, savings accounts and any insurance policies have been transferred to the LLC.
But their own personal assets haven’t been transferred; for example, their home. Any real estate assets being placed into the same Family Savings LLC can be risky.
Now, the husband and wife are not responsible to pay out of their personal assets or their house in terms of any lawsuits or claims. This LLC provides them protection from inside liabilities and also protects the assets like bonds and mutual funds etc.
Now, let’s take a look at one last example to understand inside liabilities perfectly. Suppose a customer falls on one of the properties your company owns.
They may decide to sue the business, but once again the burden doesn’t fall on any owners. They have been protected because this is an inside liability.
The existence of inside liabilities and this structure is to protect investors and entrepreneurs from going bankrupt while they decide to put their capital at risk for their businesses. And this also helps the economy as more people feel at ease while investing.