How does the limited liability of corporations work?

One of the biggest advantages to the corporate form is that the owners/shareholders are not generally personally liable for any losses or debts of the corporation itself. Thus, there is so-called limited liability and the owners can only, generally, lose whatever money has been invested in the corporation, and nothing more.

However, personal liability can attach in certain instances, despite the existence of such limited liability, such as where an owner tries to defraud corporate creditors or do some other illegal act--in these cases, a court may apply alter ego liability or pierce the corporate veil.

Similarly, limited liability does not offer protection for acts taken outside of his or her corporate capacity. For example if a corporation takes out a $500,000 loan, and its president personally guarantees the loan, the bank could go after the president’s personal assets, despite limited liability.

Of course, if a co-owner is the one who has committed some bad deed making them personally liable, you would not generally be personally liable as long as you did nothing wrong (this differs from a partnership, where you are personally liable for your partners’ wrong-doings).

Corporate directors are generally protected from being personally liable in many situations based upon the so-called business judgment rule.

Source: QuizLaw