Essay On The Concept Of Limited Liability

No investor would be willing to put their money into a certain corporation if they realized that the future limitless debts of the corporation could become personal debts for them if the corporation ever ran into a debt crisis. If, on the other hand, an investor knew that the maximum amount he could lose in a certain investment is limited to the amount he invested, he can be more confident in going forward with the investment. This is what the concept of limited liability is all about. Limited liability functions as a protection for investors who invest in corporate entities. Despite the name, the limited liability of a company is not a protector of the corporation itself, but rather the individuals who own the corporation.
The concept of limited liability plays a humongous role in influencing business decisions. For the most part, it enables the owners for a business to take a more risky approach in investment decision meant to boost the company’s revenue, sales or profit margins. The owners of a corporation, which in most cases are the ordinary and preference shareholders during the annual general meeting can elect or vote for a business to partake in certain investments that on the out-front looks risky but whose margin of return is very potentially very high. This is facilitated by the fact that the owners know that should the investment backfires and the company comes into debt, or worse still becomes bankrupt, their personal assets will not be affected in any manner. The maximum amount they can lose is the initial amount they pumped into the company. In this case, the limited liability concept not only protects the investors but also gives them an opportunity to potentially increase their financial status by confidently taking part in risky investors who returns are likely to be high if the risk of investment fails to materialize.