Question

Explain the following term/concept.

Limited Liability

Answer 1

(1) The term ‘liability’ means the state of being responsible for something, especially by law. The liability of a shareholder of a joint-stock company is limited to the extent of the face value of the shares held by him. It is limited up to the unpaid part of the face value of shares held by him; Shareholder is liable to pay only the unpaid amount on his shares. If the share amount is fully paid, then there is no further liability on the part of the shareholder.

(2) The company undertakes greater risks because the liability of the members is limited. In the event of liquidation of the company, the personal property of the shareholders cannot be attached by the creditors of the company in settlement of their debts. In such a case, the shareholders at the most may lose their investments in the shares of the company.