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The Importance of Limited Liability

By Ben Hart

Republish: EasyPublish™ Published: 06Aug2010 Word count: 468 Viewed: 1503 time(s) Get Free Content For Your Site

The following article provides a brief overview of the legal concept of limited liability and how it applies to companies in the modern global economy.

The dictionary at Law.com defines limited liability as follows:

"[T]he maximum amount a person participating in a business can lose or be charged in case of claims against the company or its bankruptcy. A stockholder in a corporation can only lose his/her investment, and a limited partner can only lose his/her investment, but a general partner can be responsible for all the debts of the partnership. Parties to a contract can limit the amount each might owe the other, but cannot contract away the rights of a third party to make a claim." http://dictionary.law.com/Default.aspx?selected=1166

For those conducting business in one or more jurisdictions a corporation with limited liability can provide a great deal of legal insulation as well as piece of mind. The said, in the United States, individuals often become confused regarding the application of limited liability concepts upon different types of legal entities. For example, limited partnership may only provide true limited liability to passive participants in the enterprise while general liability is attached to the active partner.

A corporation usually provides limited liability to the shareholders of the entity, but there may be some residual general liability placed upon the directors of the corporation, depending upon the jurisdiction. In the past a closely held "S-Corp" could be used in certain circumstances and limited liability could be enjoyed. However, many felt that both a corporation and/or an "S-Corp" required large investments of time and capital in order to maintain the legal formalities necessary to continue operation.

The Limited Liability Company is a concept that is based upon a blending of many different legal principles adopted from the jurisprudence of multiple jurisdictions. In a way, the LLC is something of an amalgam of many different types of corporate entities previously incorporated in many different international and American jurisdictions.

Toward the end of the 20th century, the idea of limited liability companies became popular among Americans and US states began enacting legislation to allow formation of LLCs (or, more properly, Limited Liability Companies). In the year 1977, the state of Wyoming became the first in the USA to pass a true piece of LLC legislation. The Act was apparently inspired by the 1892 German GmbH Code as well as the Panamanian LLC. Since this initial adoption, many other states have passed similar legislation.

Rules, regulations, and laws regarding LLCs differ depending upon jurisdiction. Therefore, those interested in forming an American LLC are wise to contact an attorney from the jurisdiction where business or administrative functions are likely to be conducted in order to be apprised of the rights and responsibilities arising from LLC ownership.

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