Cambridge O Level Business Studies · Syllabus 7115 · Understanding Business Activity
Limited Liability
What is Limited Liability?
The legal protection given to the shareholders of an incorporated company, under which their loss if the company fails is normally limited to the amount they have invested in shares. Their personal assets are not available to the company's creditors, because the company is a separate legal person from its owners.
This definition is part of the Understanding Business Activity chapter in Cambridge O Level Business Studies.
Common mistakes with Limited Liability
- “Limited liability means the business cannot fail.” Correct It limits owners’ personal exposure to the amount they invested. The company itself can still fail, and the shareholders can still lose that investment in full.
Questions students ask about Limited Liability
Does limited liability mean a company cannot fail?
No. Limited liability limits the shareholders' personal loss to the amount they have invested in shares, because an incorporated company is a separate legal person from its owners and their personal assets are not available to the company's creditors. The company itself can still fail, and shareholders can still lose that investment in full. Limited liability is created by incorporation, which is why sole traders and most partnerships have unlimited liability instead.