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Simple English definitions for legal terms
limited personal liability
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A quick definition of limited personal liability:
Term: Limited personal liability
Definition: Limited personal liability means that if someone invests in a business or is part of a legal relationship like a corporation or partnership, they usually can't be held responsible for any problems or debts the business has. They might only lose the money they invested. For example, if someone buys stock in a company and the company goes bankrupt, the stockholder might lose their money, but they won't have to pay any extra money to cover the company's debts. However, there are some exceptions to this rule, like if the investor did something wrong or illegal.
A more thorough explanation:
Definition: Limited personal liability refers to a legal concept where an individual or investor is not held responsible for the liabilities or damages of a business, except in certain circumstances. This term applies to various legal relationships such as corporations, partnerships, limited liability corporations (LLCs), or trusts. In such cases, a person with limited personal liability cannot be sued personally to cover any liabilities, and they may only lose the amount invested in the entity.
For example, if you own stocks in a corporation, you cannot be held liable for anything except for the potential loss in the price of your shares. Similarly, if you invest in an LLC, you may be held personally liable for debts only if you participated in some form of deception.
However, there are exceptions to limited personal liability that vary depending on the legal relationship. For instance, settlors of a trust may be reached by creditors in some circumstances if fraud is involved.
Examples:
- John invests $10,000 in a corporation. The corporation goes bankrupt, and John loses his investment. However, he is not held personally responsible for any of the corporation's debts or liabilities.
- Sarah is a member of an LLC. The LLC takes out a loan, but it cannot repay the debt. Sarah is not held personally responsible for the debt because she did not participate in any fraudulent activities.
- Mike creates a trust and transfers his assets to it. Later, he is sued for fraud, and the court orders him to pay damages. The court can reach the assets in the trust to satisfy the judgment because Mike was involved in fraudulent activities.
The examples illustrate that limited personal liability protects investors and individuals from being held responsible for the debts and liabilities of a business or entity, except in certain circumstances. In the first example, John is not held responsible for the corporation's debts because he is a stockholder. In the second example, Sarah is not held responsible for the LLC's debt because she did not participate in any fraudulent activities. In the third example, Mike is held responsible for the trust's assets because he was involved in fraudulent activities.