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.