What is Shareholder Liability?

Kathy Heydasch

When a corporation is established, stock is sold to buyers who are called shareholders. These shareholders now own the company, but the legal responsibility for the corporation's debts or actions falls largely on the corporation itself or its board of directors, rather than the shareholders. The extent to which a shareholder is responsible for any decisions or actions of a company is known as shareholder liability. In a corporation, shareholder liability is extremely limited.

Businessman with a briefcase
Businessman with a briefcase

The modern corporation evolved primarily to shield the owners of a business from the risk of insurmountable loss. A shareholder in a corporation stands to lose only the amount of his initial investment, rather than the sum total of the corporation's legal debts. In addition, limited shareholder liability means that a stockholder can broaden his or her portfolio by investing in multiple companies, increasing the pool of capital available to corporations. This allows corporations to take on much larger projects and associated debt.

In many cases, a shareholder may take a dual role as an officer or principal in the company. In that situation, a shareholder must be more careful to protect his or her personal assets. When signing legal documents, for instance, it is important to remember to add the official title held with the company. This can limit the liability associated with the signature.

A shareholder might increase his risk by guaranteeing a corporate debt with personal assets, called co-signing. In such a case, the rule of limited shareholder liability does not apply and the personal assets of that shareholder might be seized to pay the debt. In addition, any legal repercussions or criminal charges that result from actions the company makes based on that personal guarantee could fall upon the shareholder.

There are many different types of corporations around the world, governed by many different agencies. The concept of shareholder liability, however, is quite general and applies almost universally to the limited extent to which a shareholder is responsible for the actions of the company. In the US, a corporation is a legal entity that assumes responsibility for its own actions.

A corporation can serve as a plaintiff in a civil or criminal trial, and might be ordered to pay damages in lawsuits. If the corporation cannot pay the damages or fees, it might be dissolved. In such a case, the individual shareholder liability does not extend beyond the amount of that stockholder's personal investment.

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