Explain The Meaning And Effect Of Limited Liability 2 / 5

Limited Liability limits the liability of the owners

The idea that a company is separate legal personality from its owners comes from the case of Salomon v Salomon & Co

The members of a company are separated from the company itself by the 'veil of incorporation'

This veil gives the owners protection from being sued etc - the company itself would be sued

A company can be limited by shares or by guarantee

  1. By Shares The member is liable only to the amount of the original share purchase (including any outstanding amounts)

  2. By Guarantee The member is limited here to the amount guaranteed to pay in a winding up of the company

Therefore creditors cannot demand company debt payments from members

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