Limited liability

Limited liability

Limited liability is a concept whereby a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. A shareholder in a limited company is not personally liable for any of the debts of the company, other than for the value of his investment in that company. The same is true for the members of a limited liability partnership and the limited partners in a limited partnership. [Hannigan 2003] By contrast, sole proprietors and partners in general partnerships are each liable for all the debts of the business (unlimited liability).

Although a shareholder's liability for the company's actions is limited, the shareholder may still be liable for its own acts. For example, the directors of small companies (who are frequently also shareholders) are often required to give personal guarantees of the company's debts to those lending to the company. They will then be liable for those debts in the event that the company cannot pay, although the other shareholders will not be so liable. This is known as co-signing.


In the UK, it became more straightforward to incorporate a joint stock company following the Joint Stock Companies Act 1844, although investors in such companies carried unlimited liability until the Limited Liability Act 1855. There was a degree of public and legislative distaste for a limitation of liability, with fears that it would cause a drop in standards of probity. [Shannon (1931)] [Saville (1956)] [Amsler "et al." (1981)] The 1855 Act allowed limited liability to companies of more than 25 members (shareholders). Insurance companies were excluded from the Act, though it was standard practice for insurance contracts to exclude action against individual members. Limited liability for insurance companies was allowed by the Companies Act 1862. The minimum number of members necessary for registration as a limited company was reduced to seven by the Companies Act 1856. Limited companies in England and Wales now require only one member. [Mayson "et al." (2005), "p."55]

Similar statutory regimes were in place in France and in the majority of the U.S. states by 1860. By the final quarter of the nineteenth century, most European countries had adopted the principle of limited liability.

In the UK there was initially a widespread belief that a corporation needed to demonstrate its creditworthiness by having its shares only partly paid, as where shares are partly paid, the investor would be liable for the remainder of the nominal value in the event that the company could not pay its debts. Shares with nominal values of up to £1,000 were therefore subscribed to with only a small payment, leaving even a limited liability investor with a potentially crushing liability and restricting investment to the very wealthy. During the Overend Gurney crisis (1866-1867) and the Long Depression (1873-1896) many companies fell into insolvency and the unpaid portion of the shares fell due. Further, the extent to which small and medium investors were excluded from the market was admitted and, from the 1880s onwards, shares were more commonly fully-paid. [Jefferys (1954)]

Although it was admitted that those who were mere investors ought not to be liable for debts arising from the management of a corporation, throughout the late nineteenth century there were still many arguments for unlimited liability for managers and directors on the model of the French "société en commandite". [Lobban (1996)] Although such liability for directors is still permitted for directors of English companies, its abolition is planned as of 2006. [DTI (2005)] Further, it became increasingly common from the end of the nineteenth century for shareholders to be directors, protecting themselves from liability.

In 1989, the European Union enacted its Twelfth Council Company Law Directive, [ [ 89/667/EEC] ] requiring that member states make available legal structures for individuals to trade with limited liability. This was implemented in England and Wales by Statutory Instrument SI 1992/1699 which allowed single-member limited-liability companies. [Edwards (1998)]

Economic and social justification and criticism

Limited liability is supposed to encourage enterprise [Meiners "et al." (1979)] [Halpern "et al." (1980)] [Easterbrook & Fischel (1985)] but it has also been argued that it distorts the free market by allowing the entrepreneur to externalise some risk and impose it on society at large. [cite web | url= | title=Limited Liability | author=Rozeff, M.S. | format=HTML | accessdate=2006-07-03 ] Moreover, there has been some concern that present structures favour large creditors who are in the position to negotiate secured terms, whereas small creditors' debts are left unsecured. There have been calls to restrict limited liability to only non-managing investors but, as of 2006, these have been resisted in the UK. [DTI (2000)] The general legal response to such concerns has been to make directors liable for any dishonesty. [Ohrnial (1982)]

There is evidence that shares in public companies would be at a disadvantage if liability were unlimited [Halpern "et al." (1980)] and the experience of partly-paid shares in the nineteenth century ("supra") seems to confirm this. [Mayson "et al." (2005), "p."57] A single counter point, limited to a narrow span of time and a single company in a growth economy, existed in the 1950s where there was a healthy market in unlimited liability American Express shares. [Grossman (1995)]

The anarcho-capitalist libertarian and Austrian economist Murray N. Rothbard, in his "Power and Market" (1970), defended limited-liability, stating,

Finally, the question may be raised: Are corporations themselves mere grants of monopoly privilege? Some advocates of the free market were persuaded to accept this view by Walter Lippmann's "The Good Society". It should be clear from previous discussion, however, that corporations are not at all monopolistic privileges; they are free associations of individuals pooling their capital. On the purely free market, such individuals would simply announce to their creditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. It then rests with the sellers and lenders to this corporation to decide whether or not they will transact business with it. If they do, then they proceed at their own risk. Thus, the government does not grant corporations a privilege of limited liability; anything announced and freely contracted for in advance is a right of a free individual, not a special privilege. It is not necessary that governments grant charters to corporations.

In the U.S. lawyers have suggested that, while limited liability towards creditors is socially beneficial in facilitating investment, the privilege ought not to extend to liability in tort for environmental disasters or personal injury. [Hansmann & Kraakman (1991)] [Grundfest (1992)] [Grossman (1995)]

ee also

*Types of companies
*Limited liability company
*Limited liability partnership
*Limited partnership
*Utopia Limited
*Saloman v. Saloman & Co.


External links

* [ Limited Liability by Michael S. Rozeff]
* [ The History of the Corporate Business Firm]


*cite journal | author=Amsler, C.F. "et al." | year=1981 | title=Thoughts of some British economists on early limited liability and corporate legislation | journal=History of Political Economy | volume=13 | pages=774–93
*cite journal | author=Bagehot, W. | title=The New Joint Stock Companies Act | journal=The Economist | volume=25 | year=1867 | pages=(31 Aug) 982–3 , reprinted in cite book | author=St John-Stevas, N. (ed.) | title=Collected Works of Walter Bagehot | publisher=Economist Publications | location=London | isbn=0-85058-083-8 , "ix", "p."406.
*cite book | author=Davis, J.S. | title=Essays in the Earlier History of American Corporations | edition=vols. 1–2 | location=Cambridge, MA | publisher=Harvard University Press | year=1917
*cite book | author=Carus-Wilson, E.M. (ed.) | year=1954 | title=Essays in Economic History | edition=vol.1 | location=London | publisher=Edward Arnold
*cite book | author=Department of Trade and Industry (UK) | year=2000 | location=London | title=Modern Company Law for a Competitive Economy: Developing the Framework | id=URN 00/656
*cite web | author=- | title=Company Law Reform Bill - White Paper (Cm 6456) | year=2005 | url= | accessdate=2006-07-03
*cite journal | author=Easterbrook, F.H & Fischel, D.R. | year=1985 | title=Limited liability and the corporation | volume=52 | journal=University of Chicago Law Review | pages=89 | doi=10.2307/1599572
*cite journal | author=Edwards, V. | title=The EU Twelfth Company Law Directive | journal=Company Law | volume=19 | pages=211 | year=1998
*cite book | author=Freedman, C.E. | title=Joint-Stock Enterprise in France 1807–1867: From Privileged Company to Modern Corporation | location=Chapel Hill | publisher=University of North Carolina Press | year=1979
*cite journal | author=Grossman, P.Z. | title=The market for shares of companies with unlimited liability: the case of American Express | journal=Journal of Legal Studies | volume=24 | pages=63 | doi=10.1086/467952 | year=1995
*cite journal | author=Grundfest, J.A. | title=The limited future of unlimited liability: a capital markets perspective | journal=Yale Law Review | volume=102 | pages=387 | doi=10.2307/796841 | year=1992
*cite journal | author=Halpern, P. "et al." | year=1980 | title=An economic analysis of limited liability in corporation law | journal=University of Toronto Law Journal | volume=30 | pages=117 | doi=10.2307/825483
*cite book | author=Hannigan, B. | title=Company Law | publisher=Oxford University Press | year=2003
*cite journal | author=Hansmann, H. & Kraakman, R. | title=Toward unlimited shareholder liability for corporate torts | year=1991 | journal=Yale Law Review | volume=100 | pages=1879 | doi=10.2307/796812
*cite journal | author=Hickson, C.R. & Turner, J.D. | title=The trading of unlimited liability bank shares in nineteenth-century Ireland: The Bagheot Hypothesis | journal=Journal of Economic History | volume=63 | year=2003 | pages=931–958 | doi=10.1017/S0022050703002493
*cite book | author=Hunt, B.C. | title=The Development of the Business Corporation in England, 1800–1867 | location=Cambridge, MA | publisher=Harvard University Press | year=1936
*Jefferys, J.B. (1954) "The denomination and character of shares, 1855-1885", in Carus-Wilson "Op. cit.", "pp"344-57
*cite journal | author=Livermore, S. | title=Journal of Political Economy | volume=43 | year=1935 | pages=674–687
*cite journal | author=Lobban, M. | title=Corporate identity and limited liability in France and England 1825-67 | year=1996 | volume=25 | journal=Anglo-American Law Review | pages=397
*cite book | author=Mayson, S.W "et al." | title=Mayson, French & Ryan on Company Law | year=2005 | edition=22nd ed. | publisher=Oxford University Press | location=London | isbn=0-19-928531-4
*cite journal | author=Meiners, R.E. "et al." | year=1979 | title=Piercing the veil of limited liability | journal=Delaware Journal of Corporate Law | volume=4 | pages=351
*cite book | author=Orhnial, T (ed.) | year=1982 | title=Limited Liability and the Corporation | location=London | publisher=Croom Helm | isbn=0-7099-1919-0
*cite journal | author=Saville, J. | title=Sleeping partnership and limited liability, 1850-1856 | journal=Economic History Review | volume=8 | year=1956 | pages=418–33
*Select Committee on the Limited Liability Acts (1867) "Parliamentary Papers" (329) X.393, "p."31
*cite journal | author=Shannon, H.A. | title=The coming of general limited liability | journal=Economic History | volume=2 | year=1931 | pages=267–91 , reprinted in Carus-Wilson "Op. cit.", "pp"358-79
*cite journal | title=The first five thousand limited companies and their duration | journal=Economic History | volume=3 | year=1932 | pages=421 | author=-

Wikimedia Foundation. 2010.

Игры ⚽ Нужен реферат?

Look at other dictionaries:

  • limited liability — Shareholders in a limited company are only liable to third parties to the limit of their shareholding. Other participants e.g. directors would not normally have any personal liability except with respect to creditors where there has been wrongful …   Law dictionary

  • Limited liability — Liability Li a*bil i*ty (l[imac] [.a]*b[i^]l [i^]*t[y^]), n.; pl. {Liabilities} ( t[i^]z). [1913 Webster] 1. The state of being liable; as, the liability of an insurer; liability to accidents; liability to the law. [1913 Webster] 2. That which… …   The Collaborative International Dictionary of English

  • limited liability — noun the liability of a firm s owners for no more than the capital they have invested in the firm • Hypernyms: ↑indebtedness, ↑liability, ↑financial obligation * * * noun 1. : the liability of shareholders in a corporation or a limited company 2 …   Useful english dictionary

  • limited liability — a liability restricted by law or contract, as the liability of owners of shares in a corporation or limited company, or that of a special partner. [1850 55] * * * Condition under which the loss that an owner (shareholder) of a business may incur… …   Universalium

  • Limited Liability —    The status of limited liability gives a business a legal personality separate from that of its shareholders and limits the liability of shareholders for the debts incurred by the business, normally to the amount of their investment. The… …   Encyclopedia of the Age of Imperialism, 1800–1914

  • limited liability — Limitation of loss to what has already been invested. Bloomberg Financial Dictionary See equity shares. Dresdner Kleinwort Wasserstein financial glossary When the liability of the shareholders is limited to the nominal value of their shares, it… …   Financial and business terms

  • Limited liability — Limitation of possible loss to what has already been invested. The New York Times Financial Glossary * * * limited liability limited liability ➔ liability * * *    A restriction of the owners loss in a business to the amount of capital they have… …   Financial and business terms

  • Limited Liability — A type of liability that does not exceed the initial amount a person invested into a partnership. Limited liability refers to the terms of limited partnerships, which comprise at least one general partner, who takes on unlimited liability, and… …   Investment dictionary

  • limited liability —    The maximum amount a business owner or investor can lose if the business is subject to debts, claims or other liabilities. An owner of a limited liability company or an investor (shareholder) in a corporation usually stands to lose only the… …   Business law dictionary

  • limited liability — See: limited company, limited liability partnership …   Accounting dictionary

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”