Editing Limited liability

{{short description|Business structure where shareholders cannot owe more than their stake in a venture}}
{{Distinguish|limited company|limited liability company}}
{{Corporate law|doctrines}}

'''Limited liability''' is a legal status in which a person's financial [[Legal liability|liability]] is limited to a fixed sum, most commonly the value of a person's investment in a corporation, company, or joint venture. If a company that provides limited liability to its investors is sued, then the [[claimant]]s are generally entitled to collect only against the assets of the company, not the assets of its shareholders or other investors.<ref name=":0">{{cite journal |last=Sim |first=Michael |title=Limited Liability and the Known Unknown |url=https://papers.ssrn.com/abstract=3121519 |journal=[[Duke Law Journal]] |volume=68 |pages=275–332 |date=2018 |ssrn=3121519 |via=SSRN}}</ref><ref>{{cite journal |last=Pace |first=Susan |title=The Limited Liability Company: A Catalyst Exposing the Corporate Integration Question |url=https://repository.law.umich.edu/cgi/viewcontent.cgi?article=4335&context=mlr |journal=[[Michigan Law Review]] |volume=95 |issue=2 |pages=393–446 |date=1996 |jstor=1290118 |s2cid=158517043 |doi=10.2307/1290118|url-access=subscription }}</ref> A [[shareholder]] in a corporation or [[Limited company|limited liability company]] is not personally liable for any of the debts of the company, other than for the amount already invested in the company and for any unpaid amount on the shares in the company, if any—except under special and rare circumstances that permit "[[piercing the corporate veil]]."<ref>{{cite book |last=Presser |first=Stephen |title=Piercing the corporate veil |year=2018}}</ref> The same is true for the members of a [[limited liability partnership]] and the limited partners in a [[limited partnership]].<ref>{{cite book |last=Hannigan |first=Brenda |title=Company Law |date=2018 |publisher=[[Oxford University Press]] |isbn=978-0-19-878770-9 |url=https://books.google.com/books?id=vTdtDwAAQBAJ |access-date=9 March 2019}}</ref> 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 shareholders may still be liable for their own acts. For example, the directors of small companies (who are frequently also shareholders) are often required to give [[personal guarantee]]s of the company's debts to those lending to the company.<ref>{{cite web |title=When LLC Owners Can Be Liable |url=https://formanllcin.com/when-llc-owners-can-be-liable/ |access-date=2011-12-04}}</ref> They will then be liable for those debts that the company cannot pay, although the other shareholders will not be so liable. This is known as co-signing. A shareholder who is also an employee of the corporation may be personally liable for actions the employee takes in that capacity on behalf of the corporation, in particular torts committed within the scope of employment.

Limited liability for shareholders for ''contracts'' entered by the corporation is not controversial because this could and probably would be agreed to by both parties to the contract.<ref name=":1">{{cite journal |last1=Hansmann |first1=Henry |last2=Kraakman |first2=Reinier |title=A Procedural Focus on Unlimited Shareholder Liability |url=http://dx.doi.org/10.2307/1341705 |journal=[[Harvard Law Review]] |volume=106 |issue=2 |pages=446 |date=December 1992 |issn=0017-811X |jstor=1341705 |s2cid=55993724 |doi=10.2307/1341705}}</ref> However, limited liability for shareholders for ''torts'' (or harms that have not been agreed to in advance) is controversial because of concerns that such limited liability could lead to excessive risk-taking by companies and more negative [[externalities]] (i.e., more harm to third parties) than would be produced in the absence of limited liability.<ref name=":0" /><ref name=":1" /><ref>{{citation |title=Pigou in the Foreground |url=http://dx.doi.org/10.1057/9781137314505.0004 |work=Arthur Cecil Pigou |publisher=Palgrave Macmillan |year=2015 |access-date=2020-11-03 |isbn=978-1-137-31450-5 |doi=10.1057/9781137314505.0004|url-access=subscription }}</ref> According to one estimate, negative corporate externalities on an annual basis are equal to between 5 and 20 percent of U.S. GDP.<ref>{{cite book |date=1996-06-01 |title=Tyranny of the bottom line: why corporations make good people do bad things}}</ref><ref name=":0" />

An issue in [[Liability (financial accounting)|liability]] exposure is whether the assets of a [[Parent company|parent entity]] and the sole owner need to be subject to the subsidiary's liabilities, when the [[subsidiary]] is declared [[insolvent]] and owes [[debt]] to its [[creditor]]s. As a general principle of [[corporate law]], in the United States, a parent entity and the sole owner are not liable for the acts of its subsidiaries.<ref name="Piercing the Corporate Veil">{{cite web |title=Piercing the Corporate Veil |url=https://www.law.cornell.edu/wex/piercing_the_corporate_veil |website=LII / Legal Information Institute |access-date=2020-04-09}}</ref> However, they may be liable for its subsidiaries' obligations when the law supports "piercing the corporate veil".<ref name="Piercing the Corporate Veil" />

Provided that the parent entity or the sole owner do not maintain [[Separate legal entity|separate legal identities]] from the subsidiary (through inadequate/ undocumented transfer of funds and assets), the judgment is likely to be in favor of the creditor.<ref>{{cite journal |last1=Macey |first1=Jonathan |last2=Mitts |first2=Joshua |title=Finding Order in the Morass: The Three Real Justifications for Piercing the Corporate Veil |url=https://scholarship.law.cornell.edu/clr/vol100/iss1/2 |journal=[[Cornell Law Review]] |volume=100 |issue=1 |pages=99 |date=2014-11-01 |issn=0010-8847}}</ref> In the same regard, if a subsidiary is [[Undercapitalization|undercapitalized]] from its inception, that may be grounds for piercing the corporate veil.<ref>{{Cite web|url=https://corpgov.law.harvard.edu/2014/03/27/the-three-justifications-for-piercing-the-corporate-veil/|title=The Three Justifications for Piercing the Corporate Veil|website=corpgov.law.harvard.edu|date=27 March 2014|access-date=2020-04-09}}</ref> Further, if injustice/fraud to the creditor is proven, the parent entity or the owner may be held liable to compensate the creditor.<ref>{{Cite web|url=https://www.lexology.com/library/detail.aspx?g=4ff8ebf0-4bca-426e-8273-758140f6d0eb|title=The Five Most Common Ways to Pierce the Corporate Veil and Impose Personal Liability for Corporate Debts {{!}} Lexology|last1=Jimerson|last2=Jimerson|first2=Cobb P. A.-Charles B.|website=www.lexology.com |access-date=2020-04-09|last3=Snell|first3=Brittany N.|date=2 March 2016}}</ref> Thus, there is not one characteristic that defines the piercing of a corporate veil{{dash}}a factors test is used to determine if piercing is appropriate or not.<ref>{{Citation|title=Piercing the corporate veil|date=2020-03-12|url=https://en.wikipedia.org/w/index.php?title=Piercing_the_corporate_veil&oldid=945217467|work=Wikipedia |access-date=2020-04-09}}</ref>

If shares are issued "part-paid," then the shareholders are liable, when a claim is made against the capital of the company, to pay to the company the balance of the face or [[par value]] of the shares.

== History ==
By the 15th century, [[English law]] had awarded limited liability to [[monastic]] communities and trade [[guilds]] with commonly held property.{{citation needed|date=February 2025}} In the 17th century, [[joint stock]] charters were awarded by the crown to monopolies such as the [[East India Company]].<ref name="Reekie">{{cite book|last=Reekie|first=W. Duncan|title=The Social Science Encyclopedia|year=1996|publisher=Routledge|isbn=978-0-415-20794-2|author-link=Limited liability|editor=Adam Kuper and Jessica Kuper|page=[https://archive.org/details/socialscienceenc0002unse/page/477 477]|url=https://archive.org/details/socialscienceenc0002unse/page/477}}</ref> The world's first modern limited liability law was enacted by the state of [[New York (state)|New York]] in 1811.<ref name="economist-1999">{{cite news
|title=The key to industrial capitalism: limited liability
|date=December 23, 1999
|newspaper=[[The Economist]]
|url=https://www.economist.com/node/347323
}}</ref> In England it became more straightforward to [[Incorporation (business)|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.<ref>Shannon (1931)</ref><ref>{{cite journal |author=Saville, J. | title=Sleeping partnership and limited liability, 1850–1856 |journal=[[The Economic History Review]] |volume=8 |issue=3 |year=1956 |pages=418–433 |doi=10.2307/2598493 |jstor=2598493}}</ref><ref>Amsler, et al. (1981)</ref> 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.<ref>Mayson, et al. (2005), p. 55</ref>

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. The development of limited liability facilitated the move to large-scale industrial enterprise, by removing the threat that an individual's total wealth would be confiscated if invested in an unsuccessful company. Large sums of personal financial capital became available, and the transferability of shares permitted a degree of business continuity not possible in other forms of enterprise.<ref name="Reekie" />

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 case 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.<ref name="jefferys-1954">{{cite journal |last=Jefferys |first=J.B. |title=The denomination and character of shares, 1855–1885 |journal=[[The Economic History Review]] |volume=16 |issue=1 |pages=45–55 |year=1954 |jstor=2590580 |doi=10.2307/2590580}}</ref>

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]]''.<ref>Lobban (1996)</ref> Such liability for directors of English companies was abolished in 2006.<ref>DTI (2005)</ref> 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]],<ref>[http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31989L0667:EN:HTML 89/667/EEC]</ref> requiring that member states make available legal structures for individuals to trade with limited liability. This was implemented in England and Wales in the Companies (Single Member Private Limited Companies) Regulations 1992,<ref>[[Statutory Instrument]] SI 1992/1699</ref> which allowed single-member limited-liability companies.<ref>Edwards (1998)</ref>

== Justification ==
Some argue that limited liability is related to the concept of separate [[legal personality]] bestowed on the [[Corporation|corporate form]], which is promoted as encouraging [[entrepreneurship]] by various economists,<ref>Meiners, et al. (1979)</ref><ref name="Halpern et al. 1980">Halpern, et al. (1980)</ref><ref>Easterbrook & Fischel (1985)</ref><ref>{{cite journal |last=Millon |first=David |title=Piercing the Corporate Veil, Financial Responsibility, and the Limits of Limed Liability |url=http://www.law.emory.edu/fileadmin/journals/elj/56/5/Millon.pdf |url-status=dead |journal=Emory Law Journal |publisher=[[Emory University School of Law]] |archive-url=https://web.archive.org/web/20130916094129/http://www.law.emory.edu/fileadmin/journals/elj/56/5/Millon.pdf |archive-date=2013-09-16}}</ref> enabling large sums to be pooled towards an economically beneficial purpose.

Limited liability has been justified as promoting investment and capital formation by reassuring risk averse investors.<ref name=":0" /><ref>{{citation|last1=Jensen|first1=Michael C.|title=Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure|url=http://dx.doi.org/10.1002/9780470752135.ch17|work=Economic Analysis of the Law|pages=162–176|location=Oxford|publisher=Blackwell Publishing |isbn=978-0-470-75213-5|access-date=2020-11-03|last2=Meckling|first2=William H.|year=2004|doi=10.1002/9780470752135.ch17}}</ref>

== Criticisms ==
An early critic of limited liability, [[Edward William Cox]], a lifelong member of the Conservative Party, wrote in 1855:
{{blockquote|[T]hat he who acts through an agent should be responsible for his agent's acts, and that he who shares the profits of an enterprise ought also to be subject to its losses; that there is a moral obligation, which it is the duty of the laws of a civilized nation to enforce, to pay debts, perform contracts and make reparation for wrongs. Limited liability is founded on the opposite principle and permits a man to avail himself of acts if advantageous to him, and not to be responsible for them if they should be disadvantageous; to speculate for profits without being liable for losses; to make contracts, incur debts, and commit wrongs, the law depriving the creditor, the contractor, and the injured of a remedy against the property or person of the wrongdoer, beyond the limit, however small, at which it may please him to determine his own liability.<ref>{{cite journal |last=Ireland |first=P. |title=Limited liability, shareholder rights and the problem of corporate irresponsibility |journal=Cambridge Journal of Economics |volume=34 |pages=837–856 |issue=5 |year=2008 |doi=10.1093/cje/ben040 }}</ref>}}

Others argue that while some limited liability is beneficial, the privilege ought not to extend to liability in [[tort]] for [[environmental disaster]]s or [[personal injury]] because this leads to excessive risk-taking and negative externalities by corporations.<ref name="Grossman 1995">Grossman (1995)</ref><ref>Hansmann & Kraakman (1991)</ref><ref>{{cite journal |last=Grundfest |first=J.A. |title=The limited future of unlimited liability: a capital markets perspective |url=https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=7459&context=ylj |journal=[[The Yale Law Journal]] |volume=102 |pages=387–425 |issue=2 |year=1992 |jstor=796841 |doi=10.2307/796841}}</ref> Others argue that limited liability should be permitted, but should be taxed more heavily to offset the harm that limited liability causes. Such taxes could be structured to generate information for regulators about how risky the activities companies are undertaking are to third parties.<ref name=":0" />

The notion of corporate limited liability has met criticism from certain figures among the [[libertarian right]]. In ''For a New Liberty: The Libertarian Manifesto'', [[Murray Rothbard|Murray N. Rothbard]] approvingly quoted [[Robert W. Poole, Jr.|Robert Poole]], a fellow libertarian, who stated that a "libertarian society would be a full-liability society where everyone is fully responsible for his actions and any harmful consequences they might cause."<ref>{{cite journal |last1=Blankenburg |first1=Stephanie |last2=Plesch |first2=Dan |last3=Wilkinson |first3=Frank |title=Limited liability and the modern corporation in theory and in practice |journal=[[Cambridge Journal of Economics]] |url=https://www.jstor.org/stable/24231943 |url-access=registration |publisher=[[Oxford University Press]] |volume=34 |issue=5 |pages=829–830 |year=2010 |jstor=24231943 |doi=10.1093/cje/beq028}}</ref>

== Maritime claims ==
{{Main|Convention on Limitation of Liability for Maritime Claims}}
The 1957 Brussels Convention and the 1976 [[Convention on Limitation of Liability for Maritime Claims|London Convention on Limitation of Liability for Maritime Claims]] permit the charterer, manager, operators and [[salvor]]s of a ship, and the master and members of the crew, to limit their liability for damage caused by events occurring "on board or in direct connection with the operation of the ship, or with salvage operations" and for "consequential loss resulting therefrom."<ref>[https://treaties.un.org/doc/Publication/UNTS/Volume%201456/volume-1456-I-24635-English.pdf Convention on limitation of liability for maritime claims, 1976 (with final act). Concluded at London on 19 November 1976], no. 24635, Article 2(1)(a), accessed 18 October 2020</ref>

== See also ==
* [[Limited liability company]]
* ''[[Salomon v A Salomon & Co Ltd]]''
* [[Unlimited company|Unlimited liability company]]
* [[No liability]] – for mining companies only
* [[Proprietary company]]

== Notes ==
{{reflist|2}}

== References ==
* {{cite journal |author=Amsler, C.F. |year=1981 |title=Thoughts of some British economists on early limited liability and corporate legislation |journal=History of Political Economy |volume=13 |pages=774–793 |doi=10.1215/00182702-13-4-774 |issue=4 |display-authors=etal}}
* {{cite news |author=Bagehot, W. |title=The New Joint Stock Companies Act | newspaper=[[The Economist]] |volume=25 |year=1867 |pages=982–983 |author-link=Walter Bagehot}}, reprinted in {{cite book |editor-last=St John-Stevas |editor-first=N. |editor-link=Norman St John-Stevas |title=Collected Works of Walter Bagehot |publisher=Economist Publications |location=London |isbn=978-0-85058-083-9 |year=1986}}, pp. ix, 406.
* {{cite book |author=Davis, J.S. |title=Essays in the Earlier History of American Corporations |url=https://archive.org/details/cu31924057668380 | edition=vols. 1–2 |location=Cambridge, MA |publisher=[[Harvard University Press]] |year=1917}}
* {{cite book |editor=Carus-Wilson, E.M. |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 |title=Company Law Reform Bill – White Paper (Cm 6456) |year=2005 |url=http://www.dti.gov.uk/bbf/co-law-reform-bill/white-paper/page22800.html |access-date=2006-07-03 |url-status=dead |archive-url=https://web.archive.org/web/20060527002549/http://www.dti.gov.uk/bbf/co-law-reform-bill/white-paper/page22800.html |archive-date=2006-05-27}}
* {{cite journal |author1=Easterbrook, F.H. |author2=Fischel, D.R. |year=1985 |title=Limited liability and the corporation |volume=52 |journal=University of Chicago Law Review |pages=89–117 |doi=10.2307/1599572 |jstor=1599572 |issue=1 |url=https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=2165&context=journal_articles|url-access=subscription }}
* {{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, NC |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 |page=63 |doi=10.1086/467952 |year=1995 |s2cid=154392865}}
* {{cite journal |author=Halpern, P. |year=1980 |title=An economic analysis of limited liability in corporation law |journal=University of Toronto Law Journal |volume=30 |pages=117–150 |doi=10.2307/825483 |jstor=825483 |issue=2 |display-authors=etal}}
* {{cite book |author=Hannigan, B. |title=Company Law |publisher=[[Oxford University Press]] |year=2003}}
* {{cite journal |last1=Hansmann |first1=H. |last2=Kraakman |first2=R. | title=Toward unlimited shareholder liability for corporate torts |url=https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=6058&context=fss_papers |journal=[[The Yale Law Journal]] |volume=100 |pages=1879–1934 |issue=7 |year=1991 |jstor=796812 |doi=10.2307/796812}}
* {{cite journal |last1=Hickson |first1=C.R. |last2=Turner |first2=J.D. | title=The trading of unlimited liability bank shares in nineteenth-century Ireland: The Bagheot Hypothesis |journal=Journal of Economic History |volume=63 |issue=4 |pages=931–958 |year=2003 |s2cid=153679384 |doi=10.1017/S0022050703002493}}
* {{cite book |last=Hunt |first=B.C. |title=The Development of the Business Corporation in England, 1800–1867 |url=https://archive.org/details/developmentofbus0000hunt |url-access=registration |publisher=Harvard University Press |location=Cambridge, MA |year=1936}}
* Jefferys, J.B. (1954) "The denomination and character of shares, 1855–1885", in Carus-Wilson ''op. cit.'', pp.&nbsp;344–357
* {{cite journal |last=Livermore |first=S. |title=Unlimited liability in early American corporations |journal=Journal of Political Economy |volume=43 |pages=674–687 |year=1935|issue=5 |doi=10.1086/254837 }}
* {{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. |title=Mayson, French & Ryan on Company Law |year=2005 |edition=22nd |publisher=Oxford University Press |location=London |isbn=978-0-19-928531-0 |display-authors=etal}}
* {{cite journal |author=Meiners, R.E. |year=1979 |title=Piercing the veil of limited liability |journal=Delaware Journal of Corporate Law |volume=4 |pages=351 |display-authors=etal}}
* {{cite journal |author=Millon, D. |year=2007 |title=Piercing the Corporate Veil, Financial Responsibility, and the Limits of Limited Liability |journal=Emory Law Journal |publisher=[[Emory University School of Law]] |volume=56 |pages=1305–1382}}
* {{cite book |editor=Orhnial, T |year=1982 |title=Limited Liability and the Corporation |location=London |publisher=Croom Helm |isbn=978-0-7099-1919-3}}
* Select Committee on the Limited Liability Acts (1867) ''Parliamentary Papers'' (329) X. 393, p.&nbsp;31
* {{cite journal |author=Shannon, H.A. |title=The coming of general limited liability |journal=Economic History |volume=2 |year=1931 |pages=267–291}}, reprinted in Carus-Wilson ''op. cit.'', pp.&nbsp;358–379
* {{cite journal |title=The first five thousand limited companies and their duration |journal=Economic History |volume=3 |year=1932 |pages=421}}

{{Aspects of corporations}}

{{Authority control}}

[[Category:Corporate law]]
[[Category:Public liability]]