I wrote a version of this blog in 2012, but it's as relevant today, so I am republishing it with some edits. I made the points on Radio 4 this morning:
I've long argued for the contention in the title of this blog. I am convinced legal limited liability is a privilege — after all, if people sign a piece of paper to form a company they no longer have to accept full responsibility for their debts. That's an extraordinary state of affairs, and a massive privilege. But I think that, like all responsibilities, this one comes at a price. The price is to say who you are i.e. to disclose who really owns the company and who really runs it, as well as to say what you do i.e. to put true and fair accounts on public record.
For a long time this argument has been resisted, so it's especially welcome to note the Economist saying this week:
Limited liability–a commercial venture that protects its shareholders from personal bankruptcy–is one of the greatest wealth-creating inventions of all time.
I agree. And it then follows up saying:
But limited liability is a concession–something granted by society because it has a clear purpose. It is unclear why in parts of the world anonymity became part of the deal. Efforts to withdraw that unjustified perk deserve to succeed.
And as they add:
In dozens of jurisdictions, from the British Virgin Islands to Delaware, it is possible to register a company while hiding or disguising the ultimate beneficial owner. This is of great use to wrongdoers, and a huge headache for those who pursue them (see article). Anonymously owned companies can buy property, make deals (and renege on them), launch intimidating lawsuits, manipulate tenders–and disappear when the going gets tough. Those who seek redress run into baffling bureaucracy and a legal morass. Seeking real names and addresses means dealing with lawyers and accountants who see it as their job to shield their clients from nosy outsiders.
It does not seem unreasonable to ask who are the main recipients of this benefit [of limited liability] (with, say, stakes above 5%). Legitimate concerns for owners' safety, such as biotech firms hunted by animal-rights activists, are rare. In many more cases, such as Caribbean holding companies controlled by well-connected Russians, greater transparency is on the side of democracy and freedom. If the owners of an enterprise really want to preserve their anonymity, they can still opt for an unlimited option–but that will be their risk.
That last point is well made: limited liability is a choice. As they conclude:
Reform ought to be simple. Anyone registering a limited company should have to declare the names of the real people who ultimately own it, wherever they are, and report any changes. Lying about this should be a crime. Some dodgy places will try to hold out. But anti-money-laundering rules show international co-operation can work. You can no longer open an account at a respectable bank merely with a suitcase of cash. Let the same apply to starting a limited company.
It's great to see support for our call for reform from a paper like the Economist.
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I would that, of course matters have changed since 2012: the UK is supposedly going to have a register of beneficial ownership now, although as I noted today, this is a hollow gesture.
If The Economist could see the reason for real reform in this area several years ago it is time for the government to stop offering gestures and really invest in change. Nothing less will do. What's required is explained here.
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While limited or unlimited is a choice, I still don’t see why unlimited should have anonymity from authorities. I accept they can opt out of a public register but (if feasible) not from listing their ownership with tax authorities but without public access to the detail. But with courts available to order as they see fit to order tax office to disclose to certain parties if disputes occur.
Maybe someone could make a case for exceptional circumstances (I would be open to that but cynical) but at the very least construct the norm very decidedly to be openness. I wonder also whether some criminal activity would not be deterred by unlimited, but they would by a compulsory HMRC register.
I know if it got to that the overall solution may well be at hand, but the thought arises nevertheless.
Now Richard that really wasn’t what the lawyers and accountants had in mind when they came up with their little wheeze of removing personal liability for losses while ensuring full reward for success.
Your suggestion would clearly spoil a nice little game that has been going on for a few hundred years and rewarded some people very handsomely.
How dare you utter such nonsense in polite society, I know some fellows in parliament who will really not be best pleased with you (again!)
Why do capitalists seem unable to accept that benefits incur costs? These marvellous, wealth producing, swashbuckling capitalists seem to be acting much more like a fearful sole trader up against Tesco. (Yet somehow they seem to be all too accepting of costs for ‘welfare’ for the rest of us.)
PS Prob Typo “I would that” probably “add” is missing.
Ally this to reporting requirements on Related Party Transactions, Subsidiary Undertakings and the Substance of Transactions and you have ample reasons for auditors to ensure that secrecy based transactions are unearthed.
Problem is there is no obligation for auditors to report to society (even in “too big to fail entities), and, like on R4 yesterday, they get away with saying that secrecy trumps all else.
I can see a good case for limited liability.
I personally have taken the stance that if I am able to profit from an enterprise then I should be responsible for the risks attached so I have never had LL even when I was running a reasonable sized business with 30 odd employees.
But arguably to get some bigger enterprises off the ground then some form of LL is necessary or individuals can be held not just responsible but over responsible.
And certainly its a privilege that should be paid for.
However I`m always a bit irked when the media go on about the `risk takers` who power our business world.
Ask a fireman or a miner about risk.
I see the case
It has worked in practice
But it must be accounted f09r as it can easily be abused
Too often it is
A new perspective of if you don’t want disclose you are suggesting you have bad motive rather than the line the Radio 4 lady contributor took shouldn’t be too much to expect.
The fact that a few supposed ‘supplier problems these poor companies might have to face’ can even get to be the case against openness in a grown-up discussion illustrates the overall perspective battle.
I am not sure I follow that
Words appear missing from my intended comment, which I can guess was a last-moment editing overlook. My point is that companies can be dissuaded against secrecy via measures or options such as limited/unlimited, but we perhaps ought to consider whether they even need that chance, and instead look at the potential to only accept open business across the board with anything not registerd with all details as not having legal existence. I accept I may not foresee problems but I would hope for that starting point in a debate when viewing tax havens as a contrivance that as a society we never needed.
Case for the defence of tax havens (as epitomised by the lady contributor on radio4), is so weak that the perspective should be that companies (including unlimited) who do not disclose are firmly putting themselves up to be suspected of having bad motive of some type, and not deserving to trade in a fair system. Unless not feasible because of the many things I of course don’t know.
One other aspect of company finances that puzzles me is why in take-overs it is accepted that interest paid from loans to acquire the company (as against investing in more equipment) can be set against tax on profits. The financial history of Boots is an example here. Surely with that privilege the state is effectively paying the interest to the new share-holders purely for them to increase their wealth?
I share your sentiment
I would disallow all such borrowing
Moves are being made in the right direction
You have used this particular attack over and over again…….people using companies must do “X” otherwise the limited liability will be removed!…..The problem is you don’t really care about the benefits of limited liability you just want something to threaten as a way of getting what you want!
So from this article do we assume :-
1) That if a company goes unlimited liability then you have no problem with its secrecy?
2) That even if limited liability was removed you would just find something else to threaten as a way of forcing change?
So it’s wrong of me to want to end the abuse of limited liability?
And tax cheating?
And to want a level playing field for competition?
To wish for fair markets then?
Silly me! I’d forgotten how wanting capitalism to work to best effect was inherently unacceotable to the politicaL right wing
Disagree with your contention (and that of the Economist) that granting limited liability is a privilege. It is a right granted in return for obligations.
It comes with massive legal obligations, particularly the 7 codified responsibilities of directors.
I’m not sure what you mean by the “abuse of limited liability”? If its tax abuse you are talking about, unincorporated entities and sole traders (and for that matter LLPs) can be equally abusive.
My arguments are very clear
Well done Richard
I didn’t hear the original broadcast (I am a regular listener to the Today program but George Osborne was on earlier and I find life’s too short to listen to the garbage that sprouts out of his mouth and I turned the radio off). I managed to hear the podcast. When I got my own chair I had some media training. Essentially I was told you only have 15s to make your point; you don’t have the luxury of time. I was very impressed; clearly you have thought about this issue deeply for sufficient time to have very robust arguments and are able to articulate them forcibly. Keep up the excellent work.
Thanks Sean