Lets say you own a common stock of a very large firm, and then the company loses a case, or had data breach etc.. etc.. and has to pay money to others. Will you, as a stock owner be liable to pay something out of your pocket too?
3
-
1IIRC, Lloyd's of London all members prior to 1994 did have liability.– chux - Reinstate MonicaCommented Apr 17 at 4:25
-
@chux-ReinstateMonica The Names were more than simple shareholders, no?– Spehro PefhanyCommented Apr 19 at 18:50
-
@SpehroPefhany My limited understanding was they were a share of the company, not an owner of a share of the stock of the company. Yet I am certain others can provide a better explanation.– chux - Reinstate MonicaCommented Apr 19 at 19:18
Add a comment
|
6 Answers
Will you, as a stock owner be liable to pay something out of your pocket too?
Not directly - equity owners are not personally liable for the debts of the company. But if the company pays a large lawsuit, that's "money out the door" and will be reflected proportionally in your equity value* - meaning if you own 1% and the company pays a $1 Million lawsuit, the value of your equity would drop (all else being equal) by $10k (1% of $1M).
*Unless this payout was expected and was already reflected in the equity value. Generally the market value drops when a large expense is expected to happen, not just when it's paid.
-
3So basically you are saying, the stock price will drop and that would be how i lose money right? But nobody will ask me to send money somewhere right?– upstreamCommented Apr 16 at 16:52
-
16correct - you are not personally liable for the debts of the company Commented Apr 16 at 17:25
-
8@upstream in the worst case, the company goes bankrupt, and your stocks might become completely worthless, because all the debts are more than the company's assets. Commented Apr 16 at 23:06
-
14In principle, if you have some sort of direct, personal involvement in the wrongdoing, it is conceivable that the liability shield could be pierced. But this is absolutely not going to happen if it's just a random stock in your portfolio - it would be quite unusual even for this to happen to a large institutional investor, let alone some random person who owns a share or two.– KevinCommented Apr 16 at 23:24
-
4
In a Limited Liability Company (LLC) the liability of the stock owners is generally limited to the value of their stock.
Even if the company is liable for damages the worst that can happen is that it gets liquidated in which case you may not see any of your invested money back.
The only exceptions to this are where you qualify for further damages due to your personal behaviour as decided by a court or by signing a guaranty for a debt undertaken by the company. Examples where you could be sued would include you personally instructing the company to do something illegal or reckless.
-
The personal behavior liability would be there whether you're a shareholder or not, wouldn't it? The only relevance of behing a shareholder is that it may have motivated the illegal behavior. But a non-shareholder might do it to benefit a friend or family member.– BarmarCommented Apr 17 at 15:15
-
@Barmar My understanding is that courts can make exceptions to limited liability if someone attempts to avoid consequences of their own behavior. For example, you can't set up an LLC, commit fraud and then expect that you won't be held personally accountable. That would never apply to someone who simply bought shares in a company and never had any control over it, though. Commented Apr 17 at 15:21
-
1@JimmyJames But "setting up an LLC" is not the same as "buying shares in an LLC". The fraud is independent of being a shareholder.– BarmarCommented Apr 17 at 15:44
-
@Barmar "The fraud is independent of being a shareholder." Yes, but personal liability may not be. Commented Apr 17 at 16:08
-
2@Barmar I really have no idea why you are asking such obviously silly questions. You don't have to be actively engaged in the activity to be liable. The limits to liability are not without bounds. Commented Apr 17 at 16:42
That's one of the goals for having stock in a company. Your liability for any losses the company incurs is limited to the value of the stock you have invested in the company. The most you can lose is the entire value of the stock even if the company has debts beyond that amount you are not liable for paying any of it.
No, you will not be personally liable. That is the whole point of a corporation. With a corporation, the company itself is treated as its own entity that will have its own accounts and holdings, and will be liable for any penalties against it due to legal violations or lawsuits. The owners of the company, i.e. its shareholders, are not liable for actions taken by the company.
A ruling or penalty against the company, however, may affect its valuation. As a shareholder, you may be affected as the shares you own decrease in value.
The most common forms of a company that has (common) stock comes with liabiliy limited to the capital of the shares for the shareholder, as explained in user3819867's answer.
However, according to Wikipedia:
Some jurisdictions still provide the possibility of registering joint-stock companies without limited liability. In the United Kingdom and in other countries that have adopted its model of company law, they are known as unlimited companies.
Other than that, different legislations may differ in rules about further obligations that may still arise with legal forms of limited liability.
As an example (where publicly traded common stock still does not have further financial obligations, but some closely related legal forms do):
In germany,
a Kommanditgesellschaft has two types of shareholders: Komplementäre with (unlimited) personal liability and Kommanditisten whose liability is limited. That limit can however, be larger than the capital paid by the Kommanditist initially.
A Kommanditgesellschaft auf Aktien (KGaA) has shares for the Kommanditisten, so the shares (Aktien) refer to the limited liability part of the capital.German Gesellschaft mit beschränkter Haftung (GmbH) (private limited corporation) may state in their articles of association that the shareholders can decide an obligation to pay additional contributions, see §26 - 28 GmbHG, i.e. in addition to their share.
There are still ways out, worst case one can abandon one's share when there's a decision for unlimited additional payments.German Aktiengesetz (Stock Corporation Act, for public limited companies) does not have similar sections. It does, however, define non-financial incidental obligations §55 AktG
Incidental obligations of the stockholders
(1) Where the transfer of the shares of stock is bound to the company’s consent, the by-laws may impose on stockholders the obligation to perform on a recurrent basis, such performance not consisting of money, in addition to making contributions to the share capital. In this context, the by-laws are to determine whether such performance is to be provided in return for monetary consideration or without such monetary consideration. The obligation to perform and its scope are to be set out in the share certificates and temporary share certificates.
[...]
The other way round, legal forms such as cooperatives where the legal default is that members have additional financial obligations in case of insolvency may still limit these obligations, e.g. §105 GenG.
The current answers are all perfectly correct (on a quick read, at least), but assume that you're talking about a limited liability company. It seems likely that the OP is interested in publicly-traded limited liability companies, but the question is more broadly phrased than that.
It is perfectly possible to be a shareholder in a private, unlimited liability company, in which case you probably would be liable for any debts incurred by your company, as well as any other potential criminal penalties.
There is also one other edge case: shareholders can vote to wind down their limited liability company; in this case its debts will be subtracted from its assets before the final value is distributed to the shareholders.
-
This is wrong. A private company just isn't traded on the public market. That does not stop it from being an LLC. In fact, most LLC's are private companies. Their shareholders still have no responsibility for the debts.– MSaltersCommented Apr 18 at 12:53
-
I've made a small edit for clarification; the main thrust was that there are types of company in which the shareholders have unlimited liability; as you say you can still trade shares privately, and there's no reason the company should be an LLC (or local equivalent).– aantiaCommented Apr 18 at 14:44