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Simple English definitions for legal terms
limited liability
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A quick definition of limited liability:
Definition: Limited liability means that if you invest in a company, you are only responsible for the amount of money you put in. If the company gets into trouble and owes money, you won't have to pay more than what you invested. This protects your personal assets from being taken away to pay for the company's debts. However, there are some situations where this protection can be taken away, such as if the company is not run properly.
A more thorough explanation:
Limited liability is a characteristic of corporations and Limited Liability Companies (LLCs) that limits the liability of investors to the extent of their investment. This means that if the company faces a lawsuit or debt, the judgment is against the company and not its owners or shareholders.
For example, if you invest $10,000 in a corporation and the company goes bankrupt, you will lose the value of your shares, but you will not be held responsible for any additional debt or judgments against the company. Your personal assets, such as your car or house, are protected from being seized to pay off the company's debts.
However, there is an exception to limited liability called piercing the corporate veil. This occurs when a court determines that the company is not operating as a separate entity from its owners, and therefore the owners can be held personally liable for the company's debts.