A company is different from a Proprietorship concern and a Partnership firm in many ways. It is having a distinct legal identity which is also known as Independent Corporate Existence. I have already explained the meaning of Independent Corporate Existence which can be read by clicking here.
We have time and again heard the term Limited Liability of a Company. So, what does Limited Liability of a Company actually mean.
For a normal businessman who is running his business as a proprietor, he and the business are one and the same entity. If there are any assets that are owned by the proprietorship firm, the same are also owned by the businessman. Similar is the situation with the liabilities. The liabilities of the proprietorship firm are the same as that of the Businessman. Further, in order to recover the loans / liabilities that the proprietorship firm has incurred, the personal assets / wealth of the businessman can be attached by the Courts. This is known as unlimited liability.
However, the same is not the case with a Company. As a Company is having a separate legal identity and is a different legal person, the liability of the Company has to be paid by the Company itself. In order to discharge the liability of the Company, only the assets of the Company can be utilized and the assets of the shareholders / members cannot be attached / sold. So, in this way, the shareholders’ / members’ personal properties are safeguarded and they are not exposed the way they were exposed in a proprietorship concern. The maximum liability that a shareholder has is the nominal price of the share value that was purchased by him. This way, the fortune of the shareholder of a Company is not at stake, which is not the case with a proprietorship firm or a partnership firm.
Therefore, putting it simply, Limited Liability means that the personal assets of the shareholders of a Company are not put to risk when they become a shareholder of a Company and their assets cannot be sold off to make good the debts of the Company of which they are a part.
For example, if ‘John’ owns a Restaurant / Cafe and the assets of the firm are Rs. 10 Lakh and the Liabilities are Rs. 15 Lakh. Raju has Rs. 7 Lakh in his Bank account.
If he is running the business as a proprietorship firm, in order to pay the loans, the amount of Rs. 7 Lakh can be taken from his bank account. This is unlimited Liability where the assets of the proprietor can be taken for paying the liabilities of the Proprietorship concern.
However, if he is running the Business by way of a Company, wherein he is having 10,000 shares of Rs. 10 each, the maximum liability that John has is of Rs. 1 Lakh and the amount of Rs. 7 Lakh lying in his Bank account cannot be taken to pay the liabilities of the Business. This is an example of limited liability, where the personal assets of the shareholder cannot be taken to pay the liability of the Company.
Note: In most Partnership Firms also there is unlimited liability until and unless it is a case of a Limited Liability Partnership which is specifically mentioned and agreed upon in the Partnership Deed.
