Limited liability refers to the structure in business that restricts the financial risks and responsibilities of the investors and owners within the bounds of the amount invested in case of debts and company failures. This set-up protects the personal private assets of the business owners from any liability that the company might have including legal suit.
Unlike those organizations with unlimited liability structures, when the business suffers from any loss or legal disputes, the owner is personally accountable. In other words, the liability of the business will only affect the capital invested and not other personal assets and fortunes of the shareholders. For instance, if a company has to pay for any damages or loss because of its failure, it will be settled through the company’s finances and not by the owners’ personal accounts.
An organization or business that desires to enjoy the benefits of limited liability must first undergo the process of incorporation.
Here are some of the effects of when limited liability is applied in an organization:
- It separates the legal personality of the company from its owners or shareholders. Therefore, the company itself can legally buy, sell, enter into contracts, etc.
- It restricts all possible liabilities only against the name of the company and not its owners.
- It takes away the total control of the company from its founders and transfers the responsibilities to the board of directors and administrators.
- It encourages investors to be more confident in investing because of the minimal responsibilities in case problems arise.
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