Limited liability
From Wikinvestor
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.[1] 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.
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History
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.[2][3][4] 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.[5]
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.[6]
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.[7] Although such liability for directors is still permitted for directors of English companies, its abolition is planned as of 2006.[8] 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,[9] 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.[10]
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See also
Notes
External links
Bibliography
- , reprinted in , ix, p.406.
- - (2005). "Company Law Reform Bill - White Paper (Cm 6456)". Retrieved on 2006-07-03.
- Jefferys, J.B. (1954) "The denomination and character of shares, 1855-1885", in Carus-Wilson Op. cit., pp344-57
- Select Committee on the Limited Liability Acts (1867) Parliamentary Papers (329) X.393, p.31
- , reprinted in Carus-Wilson Op. cit., pp358-79
