What does limited liability mean?
by Jack W. Hope
Limited liability can occur in two types of business entities. A
Limited Partnership allows for certain investors, known as
limited partners, to invest money in the partnership and
be entitled to a portion of the profits of the partnership
without becoming liable for the debts of the partnership. In
order for this to work, there must be at least one partner
in the normal sense of the term, called a general partner,
who manages the business of the partnership and is personally
responsible for the debts of the partnership. It is
also necessary to file a declaration with the Ministry of
Consumer and Commercial Relations setting out the names of
the limited partners and the amount that they have invested
or have promised to invest in the company. So long
as they refrain from participating in the management or control
of the partnership business the limited partners' liability
to creditors of the partnership will be limited to the amount
they have invested or have promised to invest. If,
however, a limited partner does take part in the management
or control of the business he or she can lose the status
of limited partner and become a general partner and accordingly
become personally responsible for all the debts of the partnership.
The second business entity in which one can both be an owner
and have limited liability to the creditors of the company
is the Corporation. A corporation is owned by its shareholders,
and run by its directors and officers. None of these
people, and they can in fact be the same people or even a
single person, is normally responsible for the debts of the
corporation. The corporation may owe money to its suppliers,
may default on bank loans, may default on its lease, may
be sued for breach of contract or for negligence, and in
all of these cases the shareholders, directors and officers
of the corporation are normally protected from personal liability. One
common exception applies if they have personally guaranteed
any of these responsibilities. A bank loan and a lease
is very often guaranteed and the guarantor will be continue
to be personally liable along with the corporation in that
event. Another major exception to the protection provided
by corporate status occurs if anyone has been involved in
a fraudulent transaction. In that case, one can not
hide behind the protection of the corporation. A shareholder
may also find that he or she is responsible for paying money
back to the corporation if the corporation has paid its shareholders
dividends but, as a result, has left itself unable to pay
its creditors. Those creditors can then demand that
the shareholders put the money they were improperly paid
back into the corporation. They are not responsible
for the entire debt, but simply to return the money they
should not have received in the first place.
To contact the author, please email jhope@smhilaw.com
The information contained in this message is general
and should not substitute for the advice and counsel of
a licensed lawyer. |
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