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Limited Liability & Unlimited Liability
- In cases of unlimited liability, should the business owe money to someone, the business's owners may find their personal assets and possessions vulnerable to seizure in order to satisfy those obligations. Without limitation of liability, the business is viewed as merely a group of owners. Even if a business should structure itself in order to limit its liability, the limited liability may not apply to actions taken by the individual owners before the limited liability structure came into being.
- Limited liability creates a sort of liability "wall" between the business and its owners. Any money that the owners have contributed to the business becomes business assets, and these assets are subject to use to satisfy the business's obligations. However, beyond this active contribution to the business, the owners are insulated from having any of their personal assets considered part of the business. Therefore, should the business have debts, be subject to a money judgment in court, or otherwise owe money to the third party, only the money that is actually a part of the business can be used to satisfy those obligations.
- The most prominent limited liability structure is the corporation. Corporate owners are called shareholders, and they are only liable for the amount they contributed to the business (in other words, the money they used to buy their shares). Should the business owe money or even become insolvent, the shareholder may lose his entire investment in the company but generally cannot be held liable for anything else. New forms of limited liability structure include the LP (limited partnership), LLP (limited liability partnership) and LLC (limited liability company).
- The protections of a limited liability business structure are not absolute. Should a court decide that the real purpose of a business's creation or use was improper (for instance, avoiding payment of a judgment, or committing some sort of fraud), the court has the power to "pierce the corporate veil" and hold the business's owners personally liable. For instance, John opens a skydiving corporation (an inherently risky activity) but puts minimal money into the corporation and doesn't buy any liability insurance. When lawsuits come, the business is insolvent. In such a situation, the court may decide that the under-capitalization of the business was an abuse of the corporate form and decide to allow lawsuit plaintiffs to reach John's personal assets to satisfy their judgments.
- In addition to owners, managers and officers of limited liability businesses are generally protected from personal liability for their actions taken on behalf of the business. However, many states will allow personal managerial liability for certain dishonest business actions taken by managers, among them criminal acts, bad faith acts, or those taken against the best interests of the business.
Unlimited Liability
Limited Liability
Limited Liability Structures
Justifications to Pierce
Management Behavior
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