What does "limited liability" mean in a corporate context?

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In a corporate context, "limited liability" refers to the principle that shareholders are not personally responsible for the debts and liabilities incurred by the corporation. This means that if the corporation faces financial difficulties or is sued, shareholders' personal assets are protected; they can only lose the amount they invested in the corporation. This characteristic is a fundamental reason why many individuals choose to invest in corporations, as it reduces their risk exposure.

The concept of limited liability distinguishes corporations from other business forms, such as sole proprietorships and partnerships, where owners may be held personally liable for business debts. It encourages investment and fosters economic growth by allowing individuals to take on investment risks without jeopardizing their personal financial security.

This understanding of limited liability is critical for anyone studying corporate law, as it underpins the structure and purpose of corporations in the business landscape.

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