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Limited Liability in Businesses

Limited liability has been institutionalized with economic and political interests in United Kingdom. This concept maintains that the debts incurred by a company are its own liabilities and the shareholders or the company’s directors do not bear a direct legal liabilities for the debts. With this law, the company attains a separate legal status where the shareholders and the directors are not held as legally responsible for the losses of the company. With limited it implies that the shareholders have the obligation for the liabilities limited to the shares invested in the company. Therefore, the personal assets of the person such his home or other wealth will not be put at risk in the case the business fails. In this paper the construct of limited liability is explored in terms of its disadvantages and advantages.

Advantages of Limited Liability Form of Business

With the limited liability the businesses are not encourages rationally rather it works in minimising the fear of having personal liability in starting a business. Therefore, with a limited liability incorporation, the businesses have an unbalanced incentive for taking risks.

Separate legal personality and simplicity of incorporation- This form of business gives a separate legal status to the company whereby it can have its own legal personality, names, trademarks. Businessmen find it easier to incorporate a limited liability business owing to its simple registration process in the country.

Limited liability of the shareholders – this form of business grants protection to the personal assets of the directors. The liability of the investors in the event of business loss is also nil which encourages them to invest in the business which helps in the economic development of a country (Mark, Weidemaier, and Gauthier, 2017). The only liability for the constituting members is the amount unpaid on the shares held by them. As most of the private limited liability companies, issue shares which are full paid the members are only at risk losing the value of their invested shares and hence protecting the personal assets of the investor in case of losses. This form of company gives the financial obligations to the directors and the shareholders of the company which is limited to the amount which they had agreed to pay for their shares and this does not depend on the nominal value of shares.

But the protection given by limited liability is not extended to be used by fraudsters. The directors of the company have a legal duty for protecting the shareholders money in case the creditors lose money because of the fraud of the director then the personal liability of the directors is unlimited. The greatest advantage which has been availed by the business person is that it saves their personal assets from getting liquidated in the event of business failure or losses as was held by the landmark case of Saloman (1897). This feature makes it more trustworthy and reliable for the business persons.

Continuity and transferability – the company can continue its existence as it has a separate legal personality. The management, directors and its employees are only acting as its agents (Craig, July 3, 2015). However, a company can be terminated by liquidation, winding up or by court’s order or the order of the registrar of the companies. Further, limited liability form of business allows for easy and simple transfers and succession of ownership than with sole traders or partnerships. The sale, transfer and issue of shares is a straightforward process. The existing shareholders are given protection under the rights of pre-emption.

Availing loans – it is easier for this form of business to get loans from financial institutions than the other forms of businesses (Craig, July 3, 2015). The lending institution is able process the loan security by taking collateral of any business asset like any floating charge or by taking the business as a whole that is fixed charge.

Corporate taxes - In addition to the easy incorporation and security of personal assets, this business form unlike partnerships are tax efficient (Craig, July 3, 2015). The corporate tax rates for the limited liability form of business is lower than that for the sole trader and the partnership firms. The profits earned by a company has many tax-deductible costs and allowances which reduces the taxes. While the partnerships and sole traders pay for their income taxes which is higher than that of the limited liability corporates.

Economic advantage – the limited liability has been formulated with an economic vested interests. This have been helpful in the promotion of the commercial business activity as the entrepreneurs have been supported by limiting the risks posed to their personal assets in the starting up of a business. The economic advantage has extended from the owners to the investors in the public. With this legal form there was an aggregation of small sums to set up corporates requiring large capitals. With the limitation of the financial consequences emerging from the failure of the business venture the general public and the businessmen are encouraged to take up commercial activities.

Economic efficiency- such a legal form of business is said to be economic efficient. As this allows the people with money to be a part of business where the business activities are managed by the professionals and experienced people (Cheng, 2014). Hence, this form of business use capital of some people and business expertise of some people to run a business unlike the sole traders and the partners where there is capital but no guarantee that the people involved are experts in the business activity. Further, this legal form of business allows for economic diversification, as the shareholders can demand for a higher rate of return if the business risk is high. This also allows the companies to raise finances at lower costs as the risks faced by the shareholders is lower. The investors because of this legal form are able to have diversified portfolios as they are able to diverge their risks in a number of venture facing higher and lower risks.

Disadvantages of Limited Liability Form of Business

The concept of limited liability emerged as an economic necessity for the industries where the capital investment was unusually high during the industrial revolution of UK. However, during the industrial revolution, dominated by cotton and iron industry had the companies with unlimited liability partnerships. The ‘Great Depression’ of 1873- 1896 led to severe losses of these unincorporated, unlimited liabilities firms which were mostly run by families. The businessmen used mergers to cover up the losses and hence the emergence of the Joint stock companies (JSCs) (Ireland, 2010).

Violation of mutual agency and inherently inefficient - These JSCs were a type of partnership where the partners were general public in large numbers. This form of partnership did violate the mutual agency principle of the partnership whereby all the partners have to be involved in the management of the company. Such a partnership where the managers were operating with other’s money and the shareholders were not involved in the management of the company deemed these organizations as negligent and irresponsible.

It has been argued by that the JSCs separated the management and the ownership and therefore there was an inherent inefficiency (Ireland, 2010). The JSCs are owned by the rentier shareholders who did not give much attention to the management of the company. Hence, these JSCs are inherently prone to irresponsibility and negligence.

Corporate veil- the limited liability came with a twin concept of separate legal identity of the corporates (Nyoni, and Hart, 2018). The businessmen under the veil or mask of the corporate identity, carry out their unscrupulous business activities (Macey, 2018). Such actions which undermine the spirit of the free market and ethical business practices require the courts to lift the veil of the corporates to find out the real culprits behind the wrong actions of the corporates. The courts have the authority to sue the people operating behind the corporate veil responsible for business wrongdoings. This is the way the courts protect the shareholders and the creditors in the event of company’s liquidation.

This veil of incorporation can be lifted when there is fraud by the directors or the owners of the company. The lifting of incorporation veil was seen in the case of Gilford motor company ltd (1933) where Mr, Horne as ex-employee of a company was found guilty of using customers of his previous company to conduct business. This was done in the new company’s name whereby the court decided that the new corporate has been set up only for masking the true intentions of fraud by Mr Horne for diverting the customers of the motor company.

In another case of Broderip v Salomon (1895), Broderip was treated as an agent of the owner and the owner was held liable for the debts of the company. However, it was held that a company does not become agent of the shareholders automatically provided that it had only one shareholder and the other shareholders were only dummies. A company can be given power to act as an agent in cases where an express agreement has been provided and in the absence of such an agreement agency relationship cannot be withheld.

The veil of incorporating can be lifted when there is an issue of trust. The courts can pierce the corporate veil to find the features of the shareholders who have used this limited liability legal instrument for masking their actions. In the case of Abbey (1951), a school was given an incorporation of a company where the shares were held by the trustees on the charitable trusts of the educational institutions. Thereby, the corporate veil was removed to find out the terms which were used by the trustees for holding shares.

The corporate covering given by the limited liability is also used by the businesses for conducting torts (Peterson, 2017). Therefore, on the basis of torts the courts in Canada have lifted the corporate veil to find out the true culprits (Hargovan, & Harris, 2007). Further, the English courts have lifted the corporate veil to find out the shareholders’ nature during the times of war as in the Daimler case (1916) particularly of the enemy character. There have been taxation issues which requires the court to lift the veil of incorporation so as to disregard the separate legal status of the company when the taxes are evaded or using liberal schemes of avoiding tax without having any legislative authority.

In addition to the irresponsible conduct of the shareholders as outlined above the limited liability of the shareholders and the directors is also evoked when there is inappropriate use of the company’s name by them. According to the companies act when any manager or any other individual acting on the company’s behalf signs any promissory note, cheque for ordering good or money etc where the name of the company is not given in legible letters. Then the individual is liable for fine and bears a personal liability to his actions.

Therefore, the use of limited liability does have advantages for the businesses and shareholders. However, it has been found to be misused by the people for masking their wrongdoings under the corporate veil given by limited liability and a separate legal status. The establishment of the limited liability was in reality questionable as it was done only to economically benefit vested in politics and had little to do with the societies overall benefit. Thus, the laws have to be more stringent in stopping the misuse of the limited liability for evoking the responsibilities of the corporates towards the societies where they are operating.


Broderip v Salomon [1895] 2 Ch 323

Cheng, T. K. (2014). An Economic Analysis of Limited Shareholder Liability in Contractual Claims. Berkeley Bus. LJ, 11, 113.

Craig, R. (July 3, 2015). Limited company advantages and disadvantages.

Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 AC 307

Gilford Motor Co Ltd v Horne [1933] Ch 935

Hargovan, A., & Harris, J. (2007). Piercing the corporate veil in Canada: A comparative analysis. Company Lawyer, 28(2), 58.

Ireland, P. (2010). Limited liability, shareholder rights and the problem of corporate irresponsibility. Cambridge Journal of Economics, 34(5), 837-856.

Macey, J. C. (2018). What Corporate Veil. Mich. L. Rev., 117, 1195.

Mark, W., Weidemaier, C., & Gauthier, M. (2017). Venezuela as a case study in limited (sovereign) liability. Capital Markets Law Journal, 12(2), 215-223.

Nyoni, E., & Hart, T. (2018). The Concept of Limited Liability and the Plight of Creditors within Corporate Governance and Company Law: A UK Perspective. InterEU law east: journal for the international and european law, economics and market integrations, 5(2), 309-322.

Peterson, C. W. (2017). Piercing the corporate veil by tort creditors. J. Bus. & Tech. L., 13, 63.

Salomon v A Salomon & Co Ltd [1897] AC 22

The Abbey and Malvern Wells Ltd v Ministry of Local Government and Planning [1951] 1 CH 728.

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