The Fairness of Limited Liability

Limited liability is one of the most successful commercial creations of all time, almost singularly responsible for the growth and expansion of capitalism.  Encouraging risk and promoting successful enterprise through both small and large businesses alike, limited liability has been the driving force behind economic success in the Western world and is one of the most celebrated legal creations of all time.  But what is it about limited liability that makes it so successful?  Indeed, is the structure of limited liability fair as regards creditors, who ultimately bear the brunt of this mechanism?

Limited liability in general means a sacrifice of privacy in return for the benefit of limited personal liability.  In layman’s terms, this means that the company promoter is not personally liable for any of the company’s debts, thus encouraging risk and promoting enterprise.  For most small businesses, it is a lifeline, and without it the economy would level out and stifle with fewer new start-ups each year.  At the back end, however, these businesses leave behind a trail of debts that ultimately result in financial loss for lenders and those that operate on credit terms.  This raises the general question of whether limited liability as a creation is fair for the creditors it so apparently prejudices?

Limited liability has given life to companies across the world, by providing the reassurances necessary to entrepreneurs to take the risk, safe in the knowledge that personally speaking they should come out unscathed.  From this, more companies have grown and flourished, which has led to more jobs and better state welfare for virtually all capitalist economies.  The strength of this function has gone a long way towards building the great superpowers, and is seriously underestimated as a legal construct.

Limited liability leaves a gap in the pockets of those companies that lend money or offer their customers credit terms during the course of their business.  As a consequence of the promoter’s ability to walk away with his hands clean, many businesses find the squeeze of bad debts too severe, and end up having to take on credit of their own to meet the shortcomings.  In theory, limited liability leaves creditors in a weak situation, with relatively limited powers to regain the full amount of any monies due.

In reality, limited liability doesn’t operate in that way.  Of course, many businesses go under every year as their owners walk free of encumbrance, but generally speaking the economic world does not work between insolvent companies.  However, the flexibility allowed by limited liability has meant debt in a sense has become effective currency, and has helped businesses to survive during tough times, and to seek the financial help necessary without the appropriate risk.

Limited liability might be seen as slightly unfair at the razor’s edge, but it works all round to ensure that everyone has access to credit and the benefits of limitation of damages when it is necessary.  Ultimately, it promotes a more competitive, lower-risk environment within which business can flourish and economies can grow and multiply, providing jobs and economic strength to nations embracing its basic form.  As legal fictions go, the limited company has undoubtedly prove itself to be one of the most popular ever created, and its growth looks set to continue as it is developed and refined across the world.

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