Owners in corporations and limited partnerships have opportunities to gain financially with limited personal liability. An exception is the limited partner in this structure, as limited partners take on an inactive investment role.
A corporation is a business that filed articles of incorporation in a particular state and files periodic paperwork to satisfy state-based reporting requirements. Owners of a corporation are called shareholders. Each owner is purely an investor in the business and enjoys limited personal liability. Because the corporation is considered a separate legal entity from its owners, shareholders aren't obligated to cover the debts or legal expenses of the business.
There are exceptions to the limited personal liability protection enjoyed by investors, according to legal website Nolo. One particular example is when a shareholder is directly negligent or legally responsible for actions while representing the business. This type of scenario often occurs in small corporations where owners take an active role in company operations. Another possible liability occurs when an owner personally guarantees a loan taken out for the business. If the company can't pay, the burden shifts to that owner.
Limited Partnership Liability
The level of liability for owners in a limited partnership varies based on the partnership role. A limited partnership has a general partner, who takes on unlimited liability, and one or more limited partners who don't, according to Nolo. A general partner is an active leader in a partnership. He takes on unlimited liability while operating the business, which means he assumes the burden of handling any debts and expenses the business can't handle.
The limited partners in a limited partnership have even lower liability risks than a corporate shareholder. As with the shareholder, the limited partner is treated as an investor who is separate from the business. Unlike a shareholder, though, the limited partner is typically not actively engaged in business activities. Therefore, there's less potential that the limited partner will act illegally or negligently in a way that harms another person or company. The limited partner does have to rely on the abilities of the general partner to develop the business in a way that leads to income.