What Exactly is Limited Liability?
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The information contained within this article should not be construed as legal advice. If you require detailed information and/or advice about corporate law, trademark law, tax law or any other subject area considered in this article, please consult with an attorney in your area. LawDepot accepts no liability for errors and omissions contained within this article. This article is current to January 2, 2009.
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What Exactly is Limited Liability
A corporation is a separate and distinct entity from its shareholders. This means, provided no breaches in law have occurred, that the shareholders of a corporation cannot be held personally liable for any of the debts or obligations of the corporation. A shareholder can only lose the amount of equity that he or she has invested in the company. Beyond that, they are not responsible for the legal responsibilities (including monetary ones) of the corporation. In this sense, their liability for the company is limited, because they are only liable up to the amount of equity they have invested. This conception is often referred to as Limited Liability.
A practical example of the advantages of limited liability is as follows:
If Bob Jones carried on a catering business in his own name and the business failed, he could potentially be sued by his clients for the value of any catering contracts into which he had entered. He could also be sued by any legal entities to which he owed debts. However, if Bob Jones had incorporated a catering company of which he was just a shareholder, the company could be sued but Bob Jones the individual could not. This would mean that while Bob could lose all of the money he had invested in the corporation, he would not be liable for anything on top of that. In both cases Bob will likely lose money, but by incorporating the company he may significantly reduce his losses.
