Limited liability is treated as harmless legal plumbing, but it is one of the most powerful privileges granted to wealth in the UK and around the world. In this Funding the Future conversation with Professor Dan Plesch, we explore how corporate law shields shareholders from responsibility, fuels secrecy and tax abuse, and distorts democracy.
We explain where limited liability came from, why it now protects inequality, and what reforms could restore balance between corporations and society.
This matters for tax justice, corporate accountability and the politics of care.
This is the audio version:
There is no transcript for this podcast as it would be too long to share here. There is, however, this summary of our conversation instead:
Why limited liability matters more than we admit
In my latest Funding the Future podcast, I was joined by Professor Dan Plesch to discuss a topic that is usually treated as technical legal plumbing, but which in reality sits at the heart of modern political economy: limited liability and the power it grants to wealth.
Dan and I have long shared concerns about corporate accountability. In this conversation, we tried to return to first principles and ask a simple question: how did we create an economic system in which those who control vast resources can avoid responsibility for the consequences of their actions?
The answer, we concluded, lies in the corporate form itself.
A device with a purpose that lost its balance
Limited liability was not originally intended to protect wrongdoing. It emerged to encourage investment in risky ventures. Investors in railways or overseas trading voyages needed assurance that failure would not cost them everything they owned.
That purpose was understandable. Economic development requires risk-taking.
However, over time, what began as a practical device became something quite different. The legal protection originally designed to help relatively small investors in larger shared enterprises became a shield behind which enormous concentrations of wealth could act without fear of consequence.
Today, a corporation can devastate communities, pollute the environment, mislead customers, or collapse owing vast sums to suppliers and workers, and yet those who own it may walk away almost untouched. They lose only their stake. They can even start again tomorrow under a new name.
That is not a flaw in the system. It is how the system is designed.
Privilege dressed up as merit
We are constantly told that wealth reflects talent, innovation or hard work. But Dan and I both noted how much wealth is protected not by genius but by law.
Limited liability creates a structural privilege. It means those with capital are insulated from the risks they impose on others. Losses are socialised. Gains are privatised.
This matters because it undermines the moral argument at the heart of neoliberal economics. If markets truly rewarded merit, then responsibility would accompany reward. Instead, we have created a system where power is protected and accountability avoided.
And that protection feeds inequality. It allows the wealthy to accumulate more wealth, often at others' expense, without facing equivalent risk.
Equality before the law – or not
Dan framed this issue in constitutional terms. Magna Carta promised equality before the law. Modern human rights frameworks repeat that commitment. Yet corporate law gives shareholders a special immunity that ordinary citizens do not enjoy.
If I cause damage, I am liable. If a corporation does, responsibility is diluted or disappears.
Of course, neither of us argued that pensioners should lose their homes because they own shares. The point is balance. If investors want protection through limited liability, society is entitled to demand countervailing protections through legally required transparency, regulation and accountability.
In the era of the postwar mixed economy, the need for this balance was at least recognised. In the neoliberal era, it has been forgotten. Corporations now demand considerable rights while resisting all forms of responsibility.
Limited liability and secrecy
For me, the conversation naturally connected to my own work on tax justice and secrecy jurisdictions. Limited liability is not just about avoiding legal responsibility; it is also about hiding ownership.
Shell companies and layered corporate structures obscure who really controls assets. This allows profits to be shifted offshore, taxes to be avoided, and wealth to be concealed.
Dan emphasised that the lack of transparency in global financial systems protects trillions of pounds, euros, dollars and just about any other currency from scrutiny. That is not efficiency. It is privilege.
When HMRC estimates many billions lost from corporate tax abuse in the UK alone, we are seeing the cost of that privilege in lost public services, declining trust and rising inequality.
A debate we stopped having
One of the striking things in our discussion was how old this concern is. Adam Smith warned about absentee ownership and irresponsible managers. Victorian commentators worried about corporate fraud. Gilbert and Sullivan mocked limited liability in opera.
This was once recognised as a major issue. Then it slipped from debate.
Corporate social responsibility, public relations campaigns and the promise of trickle-down growth took its place. After the financial crash, we bailed out corporations rather than reforming them. And through all this, the abuse has continued.
The result is an economy where companies are too big to fail, too complex to regulate and too opaque to understand.
Where reform could begin
Dan stressed he was not calling for the abolition of limited liability. Nor am I. Modern economies require corporate organisation. But reform is overdue.
We discussed several obvious directions.
First, there is a need for much greater transparency. Beneficial ownership registers must be complete, public and enforced. The chain of ownership within corporate groups must be visible.
Second, accountability is essential. Parent companies should be liable for the actions of subsidiaries in defined circumstances. Directors should face consequences when companies are deliberately stripped of assets. Full accounts on a country-by-country reporting basis must be on public record.
Third, there has to be balance. If business demands deregulation in labour or environmental law, we should ask whether it is prepared to relinquish limited liability in return. That simple test reveals how dependent corporate wealth is on state-granted privilege.
Fourth, there must be tax justice. When vast fortunes are protected by legal structures, taxing them is not envy. It is about restoring equilibrium between wealth and everyone else in society.
Why this matters now
This conversation is not academic. We are living through a period of rising inequality, environmental crisis and democratic distrust. Corporations sit at the centre of all three.
If we do not understand how corporate law structures power, we cannot understand modern capitalism. And if we do not understand that, we cannot reform it.
The politics of care that I write about requires accountability. It requires institutions that serve people rather than dominate them. It requires an economy where power carries responsibility.
Limited liability reform will not solve every problem. But it is part of rebuilding that balance.
A conversation to continue
Dan ended our discussion by urging organisation, education and debate. Ministers rarely act on issues that are not publicly understood. This is one such issue.
So Dan and I are inviting readers, viewers and colleagues to engage. This is not about technical legal reform alone. It is about democracy, fairness and the kind of economy we want.
Corporate privilege did not arise by accident. It was created by law. It can be changed by law.
And if Funding the Future is about anything, it is about imagining – and building – a better economic settlement than the one we have inherited.
We will continue this conversation, and when we do, we will discuss how to take this issue forward.
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I might make two comments
Firstly that someone I know has moved to Denmark, drawn by a good woman and pushed by a dislike of what this country has become. His comment was that setting up a company in Denmark was much more involved that doing it in the UK
Secondly there is the use of ‘Limited Liability’ status by all manner of at best questionable and at worst fraudulent (usually) small business’s to attempt to protect their proprietors from legal liability for misconduct.
One obvious starting point I suggest is that Directors – and possibly shareholders in some cases need to be personally liable incases of misconduct.
I agree, entirely.
Including deliberately not paying tax, for which they should be liable.
Oh and this is the Opera
https://en.wikipedia.org/wiki/Utopia,_Limited
Looking at the entry perhaps there might be a post on modern capitalism as seen through the eyes of Gilbert and Sullivan?
Thanks
There does need to be more consideration of limited liability. Whilst it is important it’s a bit dry. It tends to get lost in all the other bad stuff that is happening at the moment.
Except …. when there is a major problem, such as the crash in 2008. Then, as you say, big companies, too big to fail, were bailed out, their losses socialised. That’s not the way it should happen. Share holders are supposed to lose their stake. That didn’t happen. Why not?
Several things strike me. Firstly, yes companies may be too big to fail, but they don’t have to be bailed out. They can be nationalised instead. IMO this should have happened in the great financial crash; it did not. Secondly, why are they too big to fail? Why do we allow such monstrously large, unaccountable, companies to develop? Why are our monopoly policies not working to prevent this? I can see that some infrastructure may be needed and can only be provided by a large organisation – perhaps the state should do this, then companies could be smaller. Thirdly, companies have become too large to be controlled by their shareholders. Instead there are controlled by “executives” who have little skin in the game.
In part this has come about by a increasing fixation with “investment” and “wealth generation” by buying and trading stocks and shares. To me this is fundamentally gambling. Fixing this requires government intervention to provide alternative saving opportunities. I’m thinking of more publicly available saving bonds via NS&I.
One conclusion is that we need smaller companies, or rather we need to limit the size to which companies can grow. Do we really need monstrously large companies?
A big and complex subject, which needed raising.
Thanks Tim
John Christensen and I may be discussing this issue next Wednesday
“Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like.”
(Edward Thurlow, in 1790 ish with respect to the East India Company and its behaviour in Bengal during the trial of Warren Hastings.)
A problem then and still one today.
Good quote
A very effective take down of what really is one big, huge generous ‘benefit of the doubt’ that just encourages bad behaviour.
Great discussion, I think it goes a long way in addressing my question of “Is the western world living through a corporate coup d’ta”.
Isn’t Reform a PLC?
No, a private company. Not quite the same, but still very unuusal in politics.
Excellent article. It is fantastic that you are ‘calling-out’ a hugely misunderstood benefit to the already wealthy.
It does need to be resolved along with the financialised system (neoliberism) we are suffering through.
The greatest challenge is that the ‘directors’ whose livelihoods / finances may be on the line are often proxies for those who have the actual wealth, so merely solving for the directors being liable isn’t really addressing the core issue. It will, however, make directors of legitimate organisations (essentially employees) who make reasonable levels of profit, pay their taxes, etc., reluctant to take on personal risks on behalf of their organisation. I think we need to go further with global taxation (as you have clearly explained previously), eliminating the various tax havens, secretive shareholdings and, fundamentally, eliminate predatory financial interests (English Water company major shareholders being a good example).
I note you say:
It will, however, make directors of legitimate organisations (essentially employees) who make reasonable levels of profit, pay their taxes, etc., reluctant to take on personal risks on behalf of their organisation.
These risks are real now. No one should take on directorship lightly. But if anyone manages prudently and can evidence that the risk is tiny.
As I understand it, this money is part of the government debt, which every one thinks is so dangerous.
Sorry, which money?
I found this discussion really interesting — but it has left me with a lot of questions.
“Today, a corporation can devastate communities, pollute the environment, mislead customers, or collapse owing vast sums to suppliers and workers, and yet those who own it may walk away almost untouched.
Dan stressed he was not calling for the abolition of limited liability. Nor am I.”
Of course, my precis ignores the various suggestions made about reforming company law, but if limited liability is the heart of the problem, why aren’t you in favour of abolishing it — even if, in practice, the likelihood of succeeding might be zero?
Also, I am not persuaded that “Limited liability was not originally intended to protect wrongdoing.” The contract a company makes with its shareholders — if the company fails, you’ll lose your money — seems fine. The dishonest part is when the company runs up debts (the recovery of which is what shareholders seek immunity from) in the knowledge that, because the company has the status of a person, individuals won’t be prosecuted for reneging on the payment of those debts. This could be avoided by the company asking the shareholders for more money to pay for services up front but, it seems clear, that isn’t what shareholders expect or want.
Obviously, I welcome measures to increase transparency, full accounts, etc. But the central issue of corporate responsibility being enforced through individual liability is yet to be addressed. And as for “If business demands deregulation in labour or environmental law, we should ask whether it is prepared to relinquish limited liability in return” their obvious reply is “we’re not”. So, then what? (I can’t see Jeff Besos saying ‘Ah, you got me there!”)
As I understand it, limited liability and companies being a legal entity are different things. In this discussion the latter is, perhaps, far more important than the former?
If we are blue sky thinking, I wonder how a company that was not allowed to borrow, other than from its shareholders, would change?
You raise the right question, but I do not think abolishing limited liability is the answer.
Limited liability was created to make long-term investment possible. Railways, utilities and now much of modern infrastructure could not have been funded if every small shareholder risked losing their house. The issue is not limited liability itself. It is the abuse of it.
Three points follow.
First, limited liability should never mean no responsibility. Directors can already be made personally liable for wrongful trading, fraud, unpaid taxes or environmental damage. The problem is enforcement. We need stronger regulation, better accounting, and real sanctions.
Second, companies should be required to maintain capital — financial, human and environmental. That is the logic of my capital-maintenance framework. If a firm cannot meet wages, pensions, taxes or clean-up costs, it should not pay dividends or bonuses.
Third, transparency matters. Proper accounts, country-by-country reporting, and liability for directors who strip assets would change behaviour far more effectively than abolishing limited liability.
So the issue is not the legal fiction of the company. It is whether the state insists that those who control companies meet their obligations.
That is politics of care in practice: markets with rules that protect people, not privilege power.
I think you’re right to say that the ‘problem is enforcement’.
In the ‘best of circumstances’ (but where there’s been wrongdoing – deliberately running up debts to suppliers, sub-contractors etc, for example) it can be difficult to prove deliberate wrongdoing; and even when it is, the creditors get little and the penalties imposed on the rogue director(s) are often weak, they hide behind other individuals, spouse, family members and so on. In the ‘worse cases’ it’s impossible to do anything.
In other cases, I’ve heard of the ‘typical’ cash-flow difficulties of an expanding small business leading to issues with some tax liabilities; and HMRC getting tough on late payments (hitting the ‘little guy’ rather than the big evaders/avoiders?) and tipping them into a ‘fire sale’ of stock and forced liquidation. Maybe they should have planned better, but somehow it seemed HMRC saw them as ‘easy pickings’.
Speaking personally, it would have been impossible to start out with my own (very small) business, since I was trading as a distributor of complex, high-tech products and consulting services – for which the (usually large, corporate) customers could have ‘taken me to the cleaners’ on the basis of some product-liability or other damages claim, in the case of non-performance; which would have been impossibly-expensive to defend. (Professional indemnity cover, even when available, would have priced me out of the market.) So the only ‘bulwark’ against that was the ‘man of straw’ argument that my Ltd company had minimal assets, so why bother making such a claim?
In practice this never happened, since the products actually performed well.
As you’ve identified, there’s a huge difference between a big plc and an SME with shareholder-managers; as well as the nature of the actual business they’re trading in (manufacturing, utilities, retail/supply-chain trading, professional services, consulting, creatives/inventives…) and how to require proper reporting and apply effective enforcement of the right standards.
On a related issue: making big corporate customers pay invoices to suppliers (especially ‘the little guys’) within decent, short timescales, could be immensely useful to the cashflow of SMEs. Not letting them impose their ridiculously-long credit terms (ie. free loans).
You are right that enforcement is often weakest where it most matters. And I agree that at present proving deliberate wrongdoing is hard, penalties are too light, and rogue directors can hide behind shell companies or family members. That is a regulatory failure, not an argument against limited liability itself.
Two changes would help. First, automatic director liability in defined cases such as deliberately unpaid taxes, pension deficits, deliberate asset stripping or persistent late payment to suppliers. That shifts the burden of proof and changes behaviour. In particular, if rules in deliberately running a company whilst knowingly insolvent were tightened so that accounting data and its absence was more readily admissible as evidence was possible then this could be much easier to price.
Second, far better transparency is required including real-time reporting of tax arrears, related-party transactions (including intra-group)and dividend payments when debts are outstanding.
You also highlight another chronic problem, which is that big firms using small suppliers as free banks. Mandatory 30-day payment terms, enforced with real penalties, would do more to support SMEs than most subsidy schemes.
The aim should be proportional rules: strong enough to stop abuse by large firms, fair enough that honest small businesses can still take reasonable risks without fear of ruin whilst being denied the chance to dump their losses of society or to illicitly profit at its expense. That balance is achievable if we choose to enforce it.
Perhaps the thing I enjoy most about your blog, Richard, is being encouraged to re-examine established practices (AKA ideas) to see if they are fit for purpose.
Regarding (much needed) credit controls for companies, I can remember, in my 20s, attending a seminar for new businesses and being explicitly told ‘invoice early, pay late’. I wonder if the tutor would have baulked at telling us ‘do people down whenever you can’?
While I’m happy with the idea of limited liability for shareholders (I don’t want to lend you £100 and lose MY house when you default on YOUR mortgage), do you see any link between rogue companies and rapidly traded transferable shares, where the shareholder may not even know which company they are investing in, let alone influence its course?
Then again, at the last AGM I voted against increasing the pay package of Nationwide’s CEO — to around £7 million — but the voting form explicitly said the board were not bound by the vote, so hardly much influence!
Noted
Thanks
This had me revisiting the 2010 paper by Paddy Ireland on this subject. I found its historical analysis extremely helpful.
It can be downloaded from here if anyone is interested:
https://www.researchgate.net/publication/227464506_Limited_Liability_Shareholder_Rights_and_the_Problem_of_Corporate_Irresponsibility
Thanks
directors can be held jointly and severally liable in certain circumstances for tax debts (usually avoidance related). fairly recent – Finance Act 2020 I think.
that said, there isn’t a requirement to have a UK director, so good luck enforcing against an offshore director…
Clearly a nuts situation!
But this has not been used, as far as I know, and it seems designed to be useless.