The Principle of Limited Liability
The principle of limited liability is one that is very important to businesses such as corporations and LLCs. Limited liability is a shield that protects business investors and limits how much they can be forced to pay if a business incurs debts. Limited liability is the opposite of general liability, where business individual investors are liable for the entire debt of the business.
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Protections
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When you invest in an organization granted limited liability protection, you are only liable for as much as you invest. For example, if you invest $10,000 in a limited liability company, you can only lose that investment and no more. If the company incurs debts of $100,000, the creditors can only take the $10,000 you invested, even if you have additional assets.
Organizations
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Limited liability is not available to just anyone. State laws give limited liability protections to specific organizations, such as corporations, limited liability companies (LLCs) and limited liability partnerships (LLPs). These business structures must comply with state laws that govern their creation. You cannot, for example, declare yourself a limited liability company and receive limited liability protections. You must register your company with the state and meet all the required elements before you can become an LLC or other protected organization.
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Piercing the Corporate Veil
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In some situations, investors or members of a limited liability organization may become liable for certain actions beyond their investment in the company. When a court holds shareholders or owners personally liable, it is said to "pierce the corporate veil." This means that the owners are no longer protected by the limited liability principal granted the company, and creditors can take compensation directly from the owners. This happens only in limited circumstances, but can include owner misconduct, commingling of corporate and personal assets or other forms of abuse.
General Liability
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If you are an owner of a company that is not afforded limited liability protections, you stand personally liable for any company debts and liabilities. For example, if you and your friend go into business and do not form a company, you enter into a partnership by default. Each of you then becomes liable for the partnership debts. So, if your partner incurs partnership debts, your creditors can come after you and your personal assets regardless of how much you've invested in the partnership.
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References
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