DECA+ Business Management and Administration Practice Exam

What is limited liability in a business context?

1. No financial risk for business owners

2. Owners are liable for business debts only up to their investment

3. Guaranteed income for business owners regardless of profit

4. Protection from personal bankruptcy

The correct answer is: Owners are liable for business debts only up to their investment

Limited liability is a key concept in business that refers to the legal structure that protects the personal assets of business owners from being used to satisfy the debts and liabilities of the business. In this context, when owners are liable for business debts only up to their investment, it means that their financial risk is restricted to the amount they have invested in the business entity, such as a corporation or a limited liability company (LLC). This structure encourages entrepreneurship, as individuals can participate in business ventures without the fear of losing their personal property, such as homes or savings, beyond their capital contribution to the business. The other choices do not accurately describe limited liability. For instance, the notion of no financial risk for business owners implies complete immunity from all forms of liability, which is not the case, as there are scenarios—such as personal guarantees or misconduct—where owners can still be held liable. The idea of guaranteed income for business owners also misrepresents the nature of business ownership, where profits are contingent upon the success of the business and are not guaranteed. Lastly, while limited liability can provide a layer of protection against personal bankruptcy in relation to business debts, it does not entirely eliminate the possibility of personal bankruptcy due to other financial obligations unrelated to the business.