Personal Liability

Topics: Business, Types of business entity, Corporation Pages: 3 (919 words) Published: January 16, 2013
Personal Liability
July 17, 2012

Personal Liability
By definition, a shareholder is: One who owns shares of stock in a corporation or mutual fund (WebFinance, Inc. , 2012). A corporation’s shareholders own the corporation. Nevertheless, they are not agents of the corporation (i.e., they cannot bind the corporation to contracts), and the only management duty they have is the right to vote on matters such as the election of directors and the approval of fundamental changes in the corporation (Cheeseman, 2010, p. 578). The shareholder makes a capital investment necessary for a company to operate. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly. Therefore, the element of risk exists in becoming a shareholder. Benefits of protecting Shareholders

There are definite benefits to commerce in protecting its shareholders from personal liability. Many business entities rely on the capital raised to organize and operate businesses. If the shielding of shareholders did not exist, investors will fear personal liability as a result of a business that comes under legal actions and will not want to accept the risk of losing the capital they invest. Generally, the shareholders have only limited liability. That is, they are liable only to the extent of their capital contributions and do not have personal liability for the corporation’s debts and obligations (Cheeseman, 2010, p. 558). Business entities can incorporate terms in shareholder agreements that will exempt them from liabilities but leave the general partners responsible for their own actions. Most shareholders are not taking an active part in the management of a company; they will not want to assume responsibility that would lead to a personal liability. A shareholder will be reluctant to invest if the fear of losing personal assets is at stake. Additionally, if the shareholder becomes liable for business practice...
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