Loading the player...

What is a 'Limited Liability'

Limited liability is a type of liability that does not exceed the amount invested in a partnership or limited liability company. The limited liability feature is one of the biggest advantages of investing in publicly listed companies. While a shareholder can participate wholly in the growth of a company, his or her liability is restricted to the amount of the investment in the company, even if it subsequently goes bankrupt and has remaining debt obligations.

BREAKING DOWN 'Limited Liability'

When either an individual or a company functions with limited liability this means that assets attributed to the associated individuals cannot be seized in an effort to repay debt obligations attributed to the company. Funds that were directly invested with the company, such as with the purchase of company stock, are considered assets of the company in question and can be seized in the event of insolvency.

Any other assets deemed to be in the company’s possession, such as real estate, equipment and machinery, investments made in the name of the institution, and any goods that have been produced, but have not been sold, are also subject to seizure and liquidation.

Limited Liability Partnerships

In a partnership, the limited partners have limited liability while the general partner has unlimited liability. The limited liability feature protects the partner's personal assets from the risk of being seized to satisfy creditor claims in the event of the company's or partnership's insolvency while the general partner’s personal property would remain at risk.

Limited Liability in Incorporated Businesses

In the context of a private company, becoming incorporated can provide its owners with limited liability since an incorporated company is treated as a separate and independent legal entity. Limited liability is especially desirable when dealing in industries that can be subject to massive losses, such as insurance.

As an example, consider the misfortune that befell numerous Lloyd's Names, who are private individuals that agree to take on unlimited liabilities related to insurance risk in return for pocketing profits from insurance premiums. In the late 1990s, hundreds of these investors had to declare bankruptcy in the face of catastrophic losses incurred on claims related to asbestosis.

Contrast this with the losses incurred by shareholders in some of the biggest public companies to go bankrupt, such as Enron and Lehman Brothers. Although shareholders in these companies lost all of their investment in them, they were not held liable for the hundreds of billions of dollars owed by these companies to their creditors subsequent to their bankruptcies.

RELATED TERMS
  1. Total Liabilities

    The aggregate of all debts an individual or company is liable ...
  2. Unlimited Liability

    A type of business where owners share joint and several responsibility ...
  3. Long-Term Liabilities

    In accounting, a section of the balance sheet that lists obligations ...
  4. Liability

    A company's legal debts or obligations that arise during the ...
  5. Other Current Liabilities

    A balance sheet entry used by companies to group together current ...
  6. Other Long-Term Liabilities

    A balance sheet item that includes obligations which are not ...
Related Articles
  1. Small Business

    Understanding Limited Liability

    Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.
  2. Investing

    Understanding Total Liabilities

    Total liabilities are the combined debts an individual or company owes.
  3. Small Business

    What's a Liability?

    A liability is a debt. It is an obligation that arises during the course of business and represents a third-party claim on the company's assets. A liability can arise in a number of different ...
  4. Investing

    Explaining Long-Term Liability

    A long-term liability is an obligation a company owes a year or more into the future.
  5. Investing

    Examples Of Asset/Liability Management

    In its simplest form, asset/liability management entails managing assets and cash inflows to satisfy various obligations; however, it's rarely that simple.
  6. Taxes

    What is a Tax Liability?

    Tax liability is the amount of money a person or entity owes to the government as the result of a taxable event.
  7. Investing

    Current Liabilities

    Current Liabilities are company debts due within one year or one operating cycle, whichever is greater. An operating cycle is the time it takes a company to purchase inventory and convert it ...
  8. Trading

    Asset Protection For The Business Owner

    Could incorporating your business help protect it? Find out here.
  9. Investing

    How To Analyze A Company's Financial Position

    Find out how to calculate important ratios and compare them to market value.
  10. Investing

    Explaining Noncurrent Liabilities

    Noncurrent liabilities are financial obligations a company owes a year or more into the future.
RELATED FAQS
  1. What is the difference between an expense and a liability?

    Learn what liabilities and expenses are, which financial statements they are listed on, and the differences between liabilities ... Read Answer >>
  2. How might a company's contingent liabilities affect its share price?

    Discover what contingent liabilities are, and how and to what extent such liabilities may have an impact on a company's share ... Read Answer >>
  3. What are some examples of current liabilities?

    Examine some common examples of current liabilities a company may owe within a year or less in order to accurately assess ... Read Answer >>
  4. What's the difference between limited liability partnership and general partnership?

    Learn the differences between general partnerships and limited liability partnerships; each type has unique traits, benefits ... Read Answer >>
  5. What kinds of liabilities appear on the balance sheet?

    Learn what current and non-current liabilities are, the difference between the two, and examples of liabilities that a company ... Read Answer >>
  6. What types of future events are taking into account for contingent liability?

    Understand the concept of contingent liabilities, and learn about some of the most common types of contingent liabilities ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center