limited liability

noun
Updated on: 26 Jul 2017

Definition of limited liability

  1. :  liability (as of a stockholder or shipowner) limited by statute or treaty

First Known Use of limited liability

1848


Financial Definition of LIMITED LIABILITY

limited liability

What It Is

Limited liability is limited exposure to financial risk by investors of a company or a partnership. This exposure is usually limited to the individual's investment.

How It Works

In certain cases where an investor invests his money with a company or partnership, this investor will not be liable for any financial risk beyond what he has invested in the business entity. These types of entities are normally limited liability partnership arrangements and limited liability companies.

For example, if an investor enters into an agreement to join a LLC, his investment of $100,000 is his total liability. In other words, he can potentially lose all of this and no more. He won't be liable for any liability beyond this initial $100,000. If he were to invest additional sums, this limited liability would then match his total contribution.

Sole proprietorships and general partners in general partnerships, on the other hand, have unlimited liability.

Why It Matters

This concept of limited liability enters into the decision making equation of businesses and investors when forming a business entity, otherwise known as choice of entity. Depending on the risks and investments of all the participants, the decision may be made to organize a business with limited liability due to many factors, including but not limited to, taxes, dividends, risk, duration, profession and control.


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