Limited Liability

Limited Liability in the United States

Plain-English Law Definition

Limited Liability as defined by Nolo’s Encyclopedia of Everyday Law (p. 437-455): Restrictions on the amount a business owner can lose if the business is subject to debts, claims, or other liabilities. One of the primary advantages of forming a corporation or limited liability company (LLC) is that the business owners stand to lose only the amount of money invested in the business creditors can’t come after an owner’s personal assets.

Issues

Under traditional rules governing corporations, corporate entities are presumed to be separate and distinct from their creators or owners. As William Meade Fletcher et al., in their Cyclopedia of the law of private corporations (§ 28, 36 and 41 (rev. ed. 1999)), corporate acts “are the acts of the . . . corporation, and are not the acts of the shareholders composing it, and their powers and duties pertain to them respectively and not to each other[.]”

Similarly, in “no particular is the distinction between the corporation and its members more marked and important than in suing and being sued.” Indeed, “limited liability is one of the principal purposes for which the law has created the corporation.”

The rule of limited liability protects the owner or parent of a corporation from being sued for the corporation’s acts. In United States v. Bestfoods, 524 U.S. 51, 61 (1998), for example, it “is a general principle of corporate law deeply ingrained in our economic and legal systems that a parent corporation . . . is not liable for the acts of its subsidiaries.”. The presumption of separateness (according to Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir. 1967)) requires courts to “start from the general rule that the corporate entity should be recognized and upheld, unless specific, unusual circumstances call for an exception. Care should be taken on all occasions to avoid making the entire theory of the corporate entity . . . useless.”

There are two exceptions to the general rule of limited corporate liability:

  • The first is alter ego, which requires, as concludes the Cyclopedia of the law of private corporations, a plaintiff to “show that the corporate form has been abused to the injury of a third person.” In the words of the Cyclopedia of the law of private corporations, alter ego is employed “where the corporate entity has been used as a subterfuge and to observe it would work an injustice.” The Black’s Law Dictionary (10th ed. 2014) defines the alter-ego rule as the “doctrine that shareholders will be treated as the owners of a corporation’s property, or as the real parties in interest, whenever it is necessary to do so to prevent fraud, illegality, or injustice”. The “rationale behind the theory is that, if the shareholders or the corporations -said the Cyclopedia of the law of private corporatios- themselves disregard the proper formalities of a corporation, then the law will do likewise as necessary to protect individual and corporate creditors.”
  • The second exception is the existence of a principal-agent relationship. As the Supreme Court has held in NLRB v. Deena Artware, Inc. (361 U.S. 398, 403 (1960), quoting Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95 (1926)) “'[d]ominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent.’”

Limited Liability in the International Business Landscape

Definition of Limited Liability in the context of U.S. international business and public trade policy: The legal separation of a corporation from its shareholders, which protects shareholders from being held fully personally responsible for the corporation’s liabilities.

Limited Liability: Open and Free Legal Research of US Law

Federal Primary Materials

The U.S. federal government system consists of executive, legislative, and judicial branches, each of which creates information that can be the subject of legal research about Limited Liability. This part provides references, in relation to Limited Liability, to the legislative process, the federal judiciary, and the primary sources of federal law (cases, statutes, and regulations).

Federal primary materials about Limited Liability by content types:

Laws and Regulations

US Constitution
Federal Statutory Codes and Legislation

Federal Case Law and Court Materials

U.S. Courts of Appeals
United States courts of appeals, inclouding bankruptcy courts and bankcruptcy appellate panels:

Federal Administrative Materials and Resources

Presidential Materials

Materials that emanate from the President’s lawmaking function include executive orders for officers in departments and agencies and proclamations for announcing ceremonial or commemorative policies. Presidential materials available include:

Executive Materials

Federal Legislative History Materials

Legislative history traces the legislative process of a particular bill (about Limited Liability and other subjects) for the main purpose of determining the legislators’ intent behind the enactment of a law to explain or clarify ambiguities in the language or the perceived meaning of that law (about Limited Liability or other topics), or locating the current status of a bill and monitoring its progress.

State Administrative Materials and Resources

State regulations are rules and procedures promulgated by state agencies (which may apply to Limited Liability and other topics); they are a binding source of law. In addition to promulgating regulations, state administrative boards and agencies often have judicial or quasi-judicial authority and may issue administrative decisions affecting Limited Liability. Finding these decisions can be challenging. In many cases, researchers about Limited Liability should check state agency web sites for their regulations, decisions, forms, and other information of interest.

State rules and regulations are found in codes of regulations and administrative codes (official compilation of all rules and regulations, organized by subject matter). Search here:

State opinions of the Attorney General (official written advisory opinions on issues of state law related to Limited Liability when formerly requested by a designated government officer):

Tools and Forms

Law in Other Regions

*This resource guide is updated frequently. However, if you notice something is wrong or not working, or any resources that should be added, please notify us in any of the "Leave a Comment" area.

Leave a Comment