limited liability

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Limited liability is a business law principle that shields individual shareholders from liability for debts owed by a business entity to the extent of the shareholder’s investment in the entity. As a result, an investor’s personal property is protected from any debt taken on by the business entity or judgment against the business. Limited liability is available for corporations and partnerships.

Limited liability is a statutorily created right, with state business laws setting the requirements that an entity must meet to qualify for limited liability. Delaware’s General Corporation Law §18 sets forth the requirements and treatment of limited liability companies in Delaware, which is a popular jurisdiction for incorporation.

An exception to the principle of limited liability is made through the doctrine of corporate veil-piercing. In such situations, egregious actions by corporations like mingling of personal and corporate assets or abuse of the corporate form will lead courts to disregard the corporation and hold investors personally liable for debts owed by the corporation.

[Last updated in June of 2023 by the Wex Definitions Team]