Limited Liability
What does "Limited Liability" mean in law?
Limited liability is the foundational principle of corporate law providing that shareholders of a corporation are not personally liable for the debts and obligations of the corporation beyond their capital contribution or investment in shares. This protection incentivizes investment by capping the downside risk for shareholders at the amount they paid for their stock, regardless of how large the corporation's liabilities may grow. Limited liability can be forfeited through piercing the corporate veil when courts find that the corporate form has been abused, or when shareholders provide personal guarantees for corporate obligations. The doctrine extends to members of LLCs and limited partners in limited partnerships, though general partners in traditional partnerships do not enjoy this protection.
Definition
Limited liability is the foundational principle of corporate law providing that shareholders of a corporation are not personally liable for the debts and obligations of the corporation beyond their capital contribution or investment in shares. This protection incentivizes investment by capping the downside risk for shareholders at the amount they paid for their stock, regardless of how large the corporation's liabilities may grow. Limited liability can be forfeited through piercing the corporate veil when courts find that the corporate form has been abused, or when shareholders provide personal guarantees for corporate obligations. The doctrine extends to members of LLCs and limited partners in limited partnerships, though general partners in traditional partnerships do not enjoy this protection.
Example
When the restaurant corporation defaulted on its lease and declared bankruptcy with $2 million in debts, the shareholders lost only their initial $50,000 investments because the principle of limited liability shielded their personal assets from the corporation's creditors.