Limited Liability Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Limited Liability, written in plain English, along with examples of how it is used.

What is Limited Liability?

Limited Liability is the limit up to which a person can be held responsible for any of his actions, non-actions or commitments and the consequential losses occurred to any person or entity. A typical example is the joint stock companies in which a shareholder is liable only to the extend of his unpaid shares in the event of bankruptcy of the company.

History and Meaning of Limited Liability

Limited Liability can be traced back to the early 19th century when it was first introduced in the United States and then eventually adopted by Europe. The idea behind limited liability was to provide a safer environment for investors to invest in businesses without risking their personal assets. This was achieved by limiting the amount of personal liability of shareholders in case a company experienced financial problems or bankruptcy. It is now a widely accepted legal principle that protects the personal assets of businesses and shareholders.

Examples of Limited Liability

  1. A limited liability company (LLC) is a common example of the use of limited liability in business. The owners of an LLC are not personally liable for the debts of the company.

  2. A shareholder of a corporation is only liable for the amount of money that they have invested in the company. For example, if a shareholder has invested $10,000 in a company and the company goes bankrupt, the shareholder is only liable up to $10,000.

  3. Limited liability is commonly used in the construction industry. Contractors and developers can limit their liability by forming a limited liability company (LLC) that is responsible for the project.

Legal Terms Similar to Limited Liability

  1. Piercing the corporate veil - This term refers to the legal practice of holding a corporation's shareholders personally liable for the corporation's actions in certain circumstances.

  2. Indemnification - A contractual agreement in which one party agrees to compensate another for any losses or damages that may occur.

  3. Shareholder - A person who owns one or more shares of stock in a corporation.