Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

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 (Example):

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. 

Related Terms View All
  • Obligation Bond
    The face value of an obligation bond is usually larger than the value of the property...
  • Nakahara Prize
    The board of directors of the Japanese Economic Association determines who wins the...
  • Self-Insure
    Let's say John Doe owns a restaurant. He buys property and casualty insurance that only...
  • Vittorio Mincato
    Born in 1936, Mincato is an accountant on paper. His first any only employer was Italian...
  • Take a Flier
    John Doe starts his own business. He looks for angel investors to give him seed capital....