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5 June, 10:10

What does the phrase limited liability mean in a corporate context? (Select all the choices that apply.)

A. Owners' liability is limited to the amount they invested in the firm.

B. Stockholders are not responsible for any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred by the firm.

C. Owners' liability is limited to fifty percent of the amount they invested in the firm.

D. Stockholders are not responsible for any encumbrances of the firm beyond fifty percent of the amount they invested in the firm; in particular, they cannot be required to pay back any debts incurred by the firm.

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  1. 5 June, 11:15
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    Answer: Option A and B.

    Explanation: Limited liability concept originates from the concept of separate legal entity. As per separate legal entity the owner of the company and the company itself are two different entities.

    Thus, in case of any default or liquidation of the company, owner will be liable to pay only to the extent of his investment in the company. The personal assets of the owner could not be taken into consideration for the purpose of repayment.

    Hence, from the above we can conclude that the correct option is A and B.
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