Limited Liability
A legal principle that restricts an owner's personal financial responsibility for business debts and obligations to the amount they have invested in the entity.
What Is Limited Liability?
Limited liability is the cornerstone protection offered by corporations, LLCs, and other formal business entities. Owners (shareholders, members, limited partners) generally are not personally liable for the entity's debts and obligations beyond their capital contribution. Their personal assets — homes, vehicles, savings, and investments — are shielded from business creditors.
Entities That Offer Limited Liability
- **Corporations** (C corps and S corps) for shareholders - **Limited liability companies** for members - **Limited partnerships** for limited partners (general partners remain personally liable) - **Limited liability partnerships** for partners in professional firms - **Limited liability limited partnerships** for general and limited partners
Important Exceptions
Limited liability is not absolute. Owners can still be personally liable for their own tortious conduct, personally guaranteed debts, unpaid payroll taxes (the trust fund recovery penalty), environmental liabilities, and securities law violations. Courts may also pierce the corporate veil to reach owners' personal assets when the entity is undercapitalized, formalities are ignored, or the structure is used to perpetrate fraud. Maintaining limited liability requires observing corporate or LLC formalities, keeping personal and business finances separate, and adequately capitalizing the business.