Limited liability: Overview, definition and example
What is limited liability?
Limited liability is a legal protection for business owners, meaning they are not personally responsible for their company’s debts or liabilities. If the business faces financial trouble or is sued, only the business’s assets are at risk, not the personal assets of the owners.
For example, if a limited liability company (LLC) cannot pay a supplier, the supplier can only go after the business’s assets, not the owner’s house or personal bank account.
Why is limited liability important?
Limited liability is important because it encourages entrepreneurship by reducing the personal financial risks of running a business. It creates a clear separation between personal and business assets, giving owners more confidence to take risks and grow their companies.
For investors, limited liability also means their losses are capped at the amount they invested, protecting their personal finances if the business fails. This structure is common in corporations, LLCs, and limited partnerships, making it easier to attract funding and partnerships.
Understanding limited liability through an example
Imagine two friends start a tech company as an LLC. They invest $20,000 each in the business. If the company is sued for $100,000, the plaintiffs can only go after the company’s assets, such as equipment or funds in the business account. The friends’ personal savings and property are protected by the limited liability structure.
In another case, a shareholder invests $50,000 in a corporation that later goes bankrupt. The shareholder loses their investment, but creditors cannot demand more money from the shareholder or seize their personal assets.
An example of a limited liability clause
Here’s how a limited liability clause might look in a contract:
“The Members of the Company shall not be personally liable for any debts, obligations, or liabilities of the Company, whether arising in contract, tort, or otherwise, beyond their respective contributions to the Company.”
Conclusion
Limited liability shields business owners and investors from personal responsibility for their company’s debts or legal issues. It’s a cornerstone of modern business structures, providing protection and encouraging investment.
By understanding and using limited liability, businesses can manage risks more effectively while giving owners and investors peace of mind. It’s an essential concept for anyone starting or running a business.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.