Limited liability

Limited liability is a legal rule that generally caps an investor’s responsibility for an organization’s debts at the amount invested. Courts and statutes recognize exceptions, including personal guarantees and some forms of misconduct.

Separate legal personality: The legal principle that an organization can hold rights and obligations distinct from those of its owners. It lets business debts belong to the entity rather than automatically becoming investors’ personal debts.
Joint-stock company: A company whose capital is divided into shares held by multiple investors. This organizational form made pooled investment possible, creating demand for predictable investor risk.
Corporation: A legal entity created under law, with rights and obligations distinct from its members. Corporate form is the most familiar setting in which investors receive limited liability.
Unlimited liability: A rule under which an owner may be personally responsible for an organization’s debts beyond the amount invested. It contrasts directly with the ordinary cap on investors’ financial exposure.
Shareholder: A person or entity that owns shares in a corporation. Shareholders generally risk their investment rather than all their personal assets.
Salomon v A Salomon & Co Ltd: An 1897 House of Lords decision affirming a properly incorporated company’s legal separation from its controlling shareholder. The case established a foundational distinction between a company’s debts and its owner’s assets.
Limited liability company: A business entity combining limited liability for owners with a flexible internal structure. It offers a common alternative to the corporation for privately held businesses.
Sole proprietorship: A business owned by one person that is not legally separate from its owner in many jurisdictions. Its owner commonly bears business debts personally, unlike a shareholder in a corporation.
Piercing the corporate veil: A court’s decision to disregard a corporation’s separate legal personality and hold its owners liable. This exceptional remedy can defeat the liability shield when legal requirements are met.
Limited Liability Act 1855: A British statute that allowed qualifying companies to limit members’ liability for company debts. It marked a major legislative step toward making limited liability broadly available in Britain.

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