Eli5: why the shareholders in a company are not liable to pay debts owed by the company?
In: 181
Imagine a relative or close friend comes to you and says he needs $1,000 for his business. He’s gotten 99 people to give him $10 each and you’d be the 100th to get him $1,000. Your only risk is losing your $10. But on the upside, if the business is successful, you would get a share of that success which could be better than parking your money in a bank.
Now imagine if you did give him the money, you were also on the hook for 1 percent (your portion of shares) of any liabilities. That may not be really worth the risk and you may find it better to park your money in a savings account rather than risk near unlimited liability, potentially risking your home, future income, and assets. In this case, the risk isn’t worth it, and you don’t invest.
As you can see, limiting the risk to one’s investment makes it easier to convince people to invest.
Latest Answers