AI Tutor
If a business collapses owing millions of dollars, who is forced to pay? In a sole proprietorship, your personal house and car are on the line, but a private limited company changes the rules entirely.

The Corporate Veil

A private limited company creates a separate corporate personality, meaning the law treats the business as an independent legal person distinct from its owners.
In 1897, the landmark case Salomon v A Salomon & Co Ltd established this principle when the court ruled that Mr. Salomon was not personally responsible for his company's debts, even though he owned nearly all of its shares.
Because of this legal separation, the company itself owns property, enters into contracts, and can sue or be sued in its own name.
If the business runs out of money and cannot pay its lenders, what is the maximum amount an investor can actually lose?

Limited Liability in Action

Shareholders benefit from limited liability, which caps their maximum financial loss strictly to the amount unpaid on the nominal value (face value) of their shares.
Suppose Maya buys 1,000 shares with a nominal value of 1each,paying1 each, paying 600 up front with 400unpaid.Evenifthecompanycollapsesowing400 unpaid. Even if the company collapses owing 250,000, creditors can legally demand only Maya's remaining $400.
A common mistake is thinking limited liability protects the company from paying its bills; the company itself has unlimited liability for all its debts, but the shareholders risk only their invested capital.
Since shareholders are safely shielded behind this legal wall, what stops company managers from taking wild, reckless gambles with other people's money?