Question

Limited Liability. Is limited liability always an advantage for a corporation and its shareholders? Hint: Could limited liability reduce a corporation's access to financing?

Answer 1

A)

First, let's discuss limited liability, Limited liability is a legal structure for an entity where the maximum loss will not exceed the amount invested in a partnership or limited liability company.

Is limited liability always an advantage for a corporation and its shareholders?

Even though the clause" limited liability" is advantageous for the corporation as a separate legal entity since the shareholders don't require to bear the full loss(There liability will be limited to a maximum of amount of investment in the company) on the other hand it will be difficult for an entity to obtain finance.

For lenders, it will not be advantageous since they will have doubts about the repayment capacity of the entity and this will cause a major problem on entities during their difficult times or when they require financial assistance immediately. To overcome this situation lenders may ask personal guarantees or security from the members, partners, or shareholders, etc..

So we can conclude that, even though the limited liability is generally advantageous, It is not beneficial for the entity in the longterm perspective.