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Liability means that your butt is legally on the line in case of a lawsuit. If you own a business, creating a corporation from that business (also known as "incorporating") means that you become a limited liability company; your assets (and the assets of any company owners) are separate from the assets of the company.
If somebody sues the company, they can't gun for your house, retirement fund, or personal assets, in most cases.
You own a spa business and run it out of your house. One day, blue-haired Mrs. Smith slips on freesia massage oil in the lobby and breaks her arm. Her son is a lawyer and sues your business. If you’re not a limited liability, the lawsuit can try to get your house, dog, retirement fund, car, and everything you're worth. If your business is a limited liability legal structure, sonny is out of luck: he and his mom can only go after your business assets and the insurance money used to insure your business.