22

I know it's a silly question before I ask but let's ask it anyway:

Let's say that X buys 10 shares of a public company Y in the stock market.

Let's also assume that Y, at some point, goes bust while X still owns the 10 shares.

Can X, along with the other shareholders, be considered liable for the debts accumulated by Y?

  • 1
    Not as normal (esp. small) shareholder in a publicly traded company. However while the same protections generally also applies to a company you yourself (perhaps with some partners) started and/or ran together, in such cases you may be somewhat liable for debt. 1)To give loans to a new upstart, the bank may demand that not only the company but also some/all of the owners are liable. 2)If you sat on the board and/or ran the company (ie. it's CEO), you may be personal liable if you didn't take certain actions prior to a bankruptcy and/or "mislead" shareholders and/or lenders. – Baard Kopperud Apr 1 '16 at 15:29
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    unrelated-rant: Sadly not. If only, for example, shareholder's investing in gold mining company would be held liable for the atrocious conditions humans have to live so their company can profit, maybe things would be a bit better all around. – Félix Gagnon-Grenier Apr 1 '16 at 21:40
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    @FélixGagnon-Grenier you are right at a very, very, very abstract level. – nourdine Apr 2 '16 at 12:43
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    @BaardKopperud In the UK at least, it is generally the directors who sign guarantees on such things as bank loans and lease agreements, not shareholders. – JBentley Apr 2 '16 at 14:21
  • @JBentley I think he was referring to the case of companies so small than the directors are the shareholders. – reirab Apr 3 '16 at 5:50
30

No. One of the key ideas behind a corporation is that an investor's liability is limited to the amount he invests, i.e. the amount of stock he buys.

This is the primary reason why small businesses become corporations, even though one person owns 100% of the stock. Then if the business goes broke, he won't lose his house, retiretment fund, etc. He'll lose everything he had in the business, but at least there's a limit to it. (In some countries there are other ways to achieve the same results, like creating a "limited liabililty company", but that's another story.)

15

No, assuming by "public company" you mean a corporation. The shareholder's individual liability is limited to their investment. Your shares can go to zero value, but that's the limit.

EDIT

In regard to the follow-up question in the comments: "Are all companies in the stock market corporations?" the answer is definitely "no." I cannot say much about other countries, but the US markets have some entities which are known as "master limited partnerships." These trade shares on the market by the usual rules, but if you buy you become a partner in the company rather than a shareholder. You still have limited liability in this case, but there will be differences, for example, in how you're are taxed.

  • Oh ok. So my next question is: are all the companies one can buy in the stock markets worldwide corporations? – nourdine Apr 1 '16 at 13:20
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    @nourdine Really you should ask a new question separately. When you do, make sure you specify what you mean by "world wide" since that's subject to some interpretation. – user32479 Apr 1 '16 at 13:25
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    There may be some technicalities, legal definitions of "public company" and "corporation" in different countries, but basically the answer to your follow-up is "yes". Any stock you buy on the stock market is going to be stock in a corporation, and your liability is limited to your investment. – Jay Apr 1 '16 at 13:38
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    @Brick: I think it's really the same question--do all the things for which shares are sold on markets like NYSE and NASDAQ limit investor liability to the amount invested, or are things which attach higher liability sold in those same markets? – supercat Apr 1 '16 at 15:23
  • @brick I think he means "stock markets worldwide" "corporations" rather than "stock markets" "worldwide corporations". – Taemyr Apr 1 '16 at 15:29
8

The answer depends on whether the company involved has 'limited liability'. Most, but not all public and listed companies and corporations have this, but not all so it is worth checking and understanding what you are getting involved with.

The expression 'limited liability' means that the owners (shareholders) of a company have a liability up to the amount of the face value of the shares they hold which they have not yet paid for. The difference is usually minor but basically it means that if you buy $10 of shares you have no liability, but if the company gives you $10 of shares, and you pay them (in cash or kind) $5, then you still have a liability of $5. If the company fails, the debtors can come after you for that liability.

An 'unlimited liability' company is a different animal altogether. Lloyds insurance is probably the most famous example. Lloyds worked by putting together consortiums to underwrite risk. If the risk doesn't happen, the consortium keeps the premiums, if it does, they cover the loss. Most of the time they are very profitable but not always. For example, the consortiums which covered asbestos caused the bankruptcies of a great many very wealthy people.

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    Can you give an example of a publically trade company that does not have limited liability? I don't believe there are any - An example would be extremely interesting! – user32479 Apr 1 '16 at 18:58
  • Debtors do not "come after" shareholders. You pay money and you receive your stock. If the company does well the value of the stock goes up; if it does poorly the value of the stock goes down. If the company goes bankrupt the value of the stock may become zero. And that's the end of the story. IANAL, but if someone gave you stock as a present for $0, and the company went bankrupt, I don't think a creditor could demand you pay them the difference between $0 and ... what? Stocks don't have a "face value". The value goes up and down with the market. – Jay Apr 4 '16 at 14:16
  • I am familiar with UK and European company law but not US. Shares in a company have a face value which is the price the company issues them at, it does not affect the price they can be traded for on the open market. If you are the registered owner of shares in a limited company that you have not paid the company for, the company (and its debtors) can chase you for what you owe. – Paul Smith Apr 5 '16 at 11:04
  • Land Rover in the UK and American Express were both publicly traded unlimited companies (they have since become limited). AFAIK in the US, they are restricted in different states but anything calling itself a 'Joint Stock' company may be unlimited. The usual advice remains caveat emptor, so if you don't know what you are buying, don't buy it. – Paul Smith Apr 7 '16 at 14:00
0

Not normally, for a limited liability company anyway. In extreme circumstances a court may "lift the veil" of incorporation and treat shareholders as if they were partners. If you are an office bearer or a director that is found to have breached duties/responsibiities then that is another matter. Dim views can be taken of shonky arrangents for companies formed for activites not of a bona fide business nature too.

0

I am a tax lawyer and ALL the RESPONSES ABOVE are 1/2 Correct but also 1/2 Wrong and in tax law this means 100% WRONG (BECAUSE ANY PART INCORRECT UNDER TAX LAW will get YOU A HUGE PENALY and/or PRISON TIME by way of the IRS!

So in ESSENCE ALL the above answers are WRONG! Let me enlighten you to the correct answer in 5 parts, as people that do not practice tax law may understand (but you still probably will not understand, if you are NOT a Lawyer). 1) All public companies are corporations (shown by Ltd.), 2) only Shareholders of Public companies (ie, traded on the NYSE stock market) are never liable for debts of a bankrupt company, due to the concept of limited liability. 2) now Banks may ask a sole proprietorship (who wants to incorp. for example) to give collateral, such as owners stocks/bonds or his/her house, but then of course the loanee can tell the Bank No Thanks and find a lender that may charge higher interest rates but lend money to his company with little to NO collateral. 3) Of course not all companies are publicly traded and these are called private companies. 4)"limited liability" has nothing to do directly with subsequent shareholders (the above answer is inaccurate!), it RELATES rather to INITIAL OWNERS INVESTMENT in their company, limiting the amount of owner loss if the company goes bankrupt. 5) Share Face-value is usually never related to this as shares are sold at market value in real life instances (above or below face-value), or the most money Investments Banks or owners can fetch for the shares they sell (not what the stock's face-value is set at upon issuance). Never forget, stocks are sold in our Capitalistic System to whomever pays the most, as it is that Buyer who gets to purchase the stock!

  • Thanks but I am more confused than before. So to summarize, anything I buy on the NY stock exchange is safe as it enforces limited liability? E.g. facebook, coca cola, unilever, nike, that kind of stuff – nourdine Apr 3 '16 at 13:54
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    You'd probably have a better chance of getting people to read (and perhaps vote up) your answer if you took the time to break it up into shorter paragraphs, used proper Markdown formatting (in particular, a numbered list might be a good idea here) and followed standard English style conventions for punctuation and capitalization. Or, to put it more crudely, nobody wants to read a wall of text that looks like it was typed by Zippy the Pinhead, no matter how valid the actual message buried in it might be. – Ilmari Karonen Apr 3 '16 at 15:21
  • "All the above" is not a meaningful reference on Stack Exchange, as entries are re-ordered based on how many votes each receives and which is accepted by the OP. You might give a more clear description of which answers you are saying are inaccurate. – Jay Apr 4 '16 at 14:20
  • Not sure what country the poster is from. In the U.S., corporations are indicated by "Incorporated" or "Corporation", which can be abbreviated "Inc" and "Corp" I see "Ltd" on company names from the UK and commonwealth countries. The idea appears to be similar to a US "corporation". Note many US states also now have "Limited Liability Companies", which provide the owners with limited liability but don't sell stock. – Jay Apr 4 '16 at 14:26
  • Not sure what the relevance of your second point 2 is. (Note you have two point 2's.) The OP wasn't asking about qualifying for a loan, but about liability of share holders. Perhaps you werer trying to build toward the idea that a lender might ask the owner of a small corporation to co-sign a loan using personal assets, in which case his limited liability as a shareholder becomes essentially irrelevant? But if so, not relevant to shareholders not part of such an agreement. – Jay Apr 4 '16 at 14:32
-1

In an open corporation scenario a stock holder may well be found liable. It's a very narrow and uncommon bunch of scenarios but it's well worth sharing. See the paragraph on open corporations in the following document: http://nationalparalegal.edu/public_documents/courseware_asp_files/businessLaw/RightsOfShareholders/LiabilityOfShareholders.asp

  • The "narrow" cases here involve the shareholder taking specific action beyond taking a share that constitutes fraud or other prohibited action. The liability due to the investment is still limited - The liability described here comes from these additional actions. It's not really the same as what you asked originally. – user32479 Apr 2 '16 at 22:00
  • I agree. The liability arises for doing more than just buying the stocks. It would be like buying some stocks, steal a car and then blame on your stocks for having ended up in prison. Lol – nourdine Apr 2 '16 at 22:12

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