Limited liability separates the financial responsibility of a business from the personal assets of its investors. This lesson explains the basic rule, how it differs from unlimited liability, and the circumstances in which an investor may still face personal responsibility.
Limited liability is a legal status that limits a person's financial liability to a fixed amount, commonly the value of their investment in a corporation or company. If a company is sued, claimants generally seek payment from the company's assets rather than the personal assets of its shareholders.
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What is limited liability?
A legal status that generally limits an investor's responsibility for company obligations to their investment and any unpaid amount on their shares.
How does unlimited liability differ from limited liability?
With unlimited liability, a sole proprietor or general partner may be personally responsible for all business debts.
What is a personal guarantee?
An individual's promise to repay a company debt if the company cannot pay; the guarantor may become personally liable.
What does piercing the corporate veil mean?
A court exceptionally disregards the separation between a company and its owner or parent, potentially exposing them to company obligations.
What liability may arise from part-paid shares?
A shareholder may have to pay the unpaid balance of the shares' face or par value.
Quiz questions
What did England's Joint Stock Companies Act 1844 change about company formation and investor liability?Answer: It made incorporation easier, while investors remained subject to unlimited liability.
Which companies were excluded from England's Limited Liability Act 1855?Answer: Insurance companies.
How did transferable shares support business continuity?Answer: Investors could change while the business continued operating.
Why can tort claims raise a different limited-liability concern from contract claims?Answer: Torts can cause harms that the affected parties did not agree to in advance.
Under the general United States principle described for parent companies, what follows merely from owning a subsidiary?Answer: The parent is not liable for the subsidiary's debts solely because of that relationship.
Based on the Wikipedia article Limited liability, licensed CC BY-SA 4.0. Adapted into a summary, flashcards and quizzes.