In this morning's video I note that we've had limited liability companies in their current form for about 170 years now, but no one back then imagined we'd have more than five million of them. So, are we really doing the right thing giving limited liability to anyone who asks for it now, or should we be more circumspect?
The audio version of this video is here:
The transcript is:
Limited liability is a privilege.
It's one I've enjoyed on many occasions throughout my career because I've been a director of quite a lot of companies over the last 40-plus years. They were put in place to undertake an economic activity and we were protected as directors, as shareholders - and I've been both - from the consequences of our actions by the existence of limited liability.
Limited liability was a creation that was first known about in the Elizabethan era, but in its modern form, it was created in a way that is readily available to everyone from about the 1850s onwards, when in the UK, companies were first allowed to be registered with limited liability by the prospective shareholders getting together, signing a document to declare that they wished to be a company, applying to have limited liability, and being granted it by a registrar.
That registrar still exists. It's called the Registrar of Companies in the UK, and they run something called Companies House, which still records all those companies which enjoy this privilege of limited liability which enjoy this privilege of limited liability to this day. There's over 5 million companies that have that privilege right now.
But I stress this is a privilege. And when you think about it, it is a totally absurd privilege. Just imagine that today somebody came up with this idea that one or two people - and one is enough - can sign a piece of paper and say that they want to be a limited liability company and as a consequence if something goes wrong in the trade that they undertake then, in the vast majority of circumstances, they will not be responsible to the creditors of the company that they have created for the debts that it has incurred, even though those creditors, whether they be employees, or suppliers, or a tax authority, have incurred liabilities with that company in good faith. Everyone would say that this was an abuse of the rights of those employees, those creditors, and that tax authority. And they would be absolutely right to do so, because limited liability is an abuse of the rights of those people.
What it says is that all those people who trade in good faith with the company might be taken for a ride as a consequence, and lose their money, and have very little, and in some cases, no right of recovery whatsoever. And that's okay. The shareholders can walk away, the loss is suffered by somebody else, and society supposedly benefits.
Well, the truth is that society probably has benefited from the existence of limited liability overall. There is evidence that this capacity to create limited liability companies has permitted the accumulation of capital from a wide range of sources to create undertakings that could otherwise not have existed.
For example, the railways of the UK would not have been built without the existence of limited liability companies, and many other large companies ever since have accumulated capital in this way, and overall, we've probably benefited as a result.
But the concept is still used, and well over 95 percent of all companies are tiny, run by one or two people at most these days. Do they need limited liability? Should they be protected from the consequences of their own actions, which only they know about, especially when the accounts that they have to put on public record are very limited in scope and aren't available until nine months after their year-end, meaning that everyone who is trading with them is at significant risk most of the time.
Is that privilege something that we should still provide to everybody who asks for it? Or should we regulate its availability a lot more tightly?
Should we, for example, make this privilege of limited liability available to people even with regard to their tax liabilities? Why should we do that?
Should we make it available with regard to the obligation that people have to their employees? Why should we do that?
And is it fair to do this with regard to trade creditors as well? People who genuinely supply goods and then lost their money as a consequence.
These are genuine questions that need to be answered because this cost is imposed on society at large. And there's no real evidence, especially when it comes to smaller companies, that the benefit is significant.
There is ample evidence that the benefit is abused. We do know that there are many companies that are created that never account for what they do.
We do also know that maybe 30 per cent of small companies don't pay their corporation tax liabilities, and in that case they probably don't also hand over the VAT that they owe and the PAYE that they also have owing to HM Revenue and Customs in regard to their employees and the deductions that are payable by them.
Do we, therefore, want to do this?
I ask the question in all seriousness because I think the assumption that limited liability is a universal good thing is something that we need to challenge now.
The time has come to question whether we need fundamental reform of the availability of limited liability to make sure that it provides a benefit to society and not a cost.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
n Wales residential landlords have to be licensed and they have to take an exam to demonstrate that they understand their responsibilities so
1. An ‘exam’ for would be Directors to demonstrate that they understand their duties as directors. Holding certain qualifications may provide exemptions eg Chartered Accountant, Solicitor etc
2. They should provide evidence of identity in person (Possibly at the same time as they do the exam)
3. You have to be a UK National or legally resident in the UK
4. Be a ‘Fit and Proper’ person, I suggest that there should be a Criminal Record check and notice given of those who wish to become directors with a right of objection, Police, HMRC & Trading Standards would be statutory consultees. I would also suggest that a subsequent Criminal Conviction could lead to disqualification, as should breaches of the rules around Limited Companies eg failure to file accounts.
5. Limited Liability status should not act as a shield against malfeasance or failure to pay priority creditors – employees and HMRC
As far as Point 3 goes there could be an exemption where a Company trades ‘across borders’ and can demonstrate a reason for appointing a ‘Non UK’ Director eg if a Wine Merchant wanted to appoint a director from the area they bought wine in
I like this idea
Unless the “exam” was simply a rubber stamp for limited companies, most company directors would simply fail a real test, particularly number 1; or understanding or executing their obligations. It doesn’t matter anyway, because nobody will ever check whether the test is actually applied, or followed up to audit whether they live up to it.
This is Britain. Regulations are designed to fail.
Make it at least as hard as a driving test….
Um, sorry but my post has lost its formatting…………
I’ve noticed lately comments queued for moderation aren’t formatted the way they used to be. They’re appearing ok when they do, but that does make me wonder if all is well with this blog’s back-end.
The bank end is controlled by WordPress.
We recently upadted that and there is obviously an issue to resolve there
I suspect there will be another uopdate soon.
OECD on employment in different countries supports the view that a large number of the limited companies are ‘small’ – and these are probably not the organisations that the concept of Limited Liability was set up to support (see below).
I’m sympathetic to John’s list (perhaps failure to file accounts on time should be a criminal conviction?) and am astonished that some people seem able to set up a series of failed companies. Some builders (for example) seem to do this , protecting them from liability (and makes so called ‘guarantees’ of little value). I note, however, that large companies now set up subsidiaries for different initiatives. So the limited company is not just used to provide protection to ‘small players’.
On the other hand, the presence of companies also means that even individuals need to set one up in order to be eligible to bid for some work – so there needs to be a mechanism not to punish ‘good actors’. There is an expectation that a company is the correct vehicle for some methods of doing business. Something similar to John’s list might also need to be applied to LLPs.
From something I looked at a little while ago:
– SMEs make up ~95% of companies (in US, Japan, UK)
– There are more companies of smaller size than of any bigger size
– This pattern has been in place for many decades
– Despite the large number of small businesses, these small businesses employ a relatively small % of the people of the country.
This last point is important – I am normally surprised that right wingers are allowed to stress the number of small companies, not the number of people working in them, or the abuse permitted.
From 2009 OECD data
Japan Japan UK UK USA USA
maximum number of employees % employed % enterprises % employed % enterprises % employed % enterprises
≤ 9 8.4 46.2 10.5 74.7 4.6 60.2
10 ≤ 19 10.2 23.8 7.0 10.7 4.8 15.4
20 ≤ 49 16.9 18.1 12.0 8.0 NoData NoData
50 ≤ 249 31.0 10.2 26.8 5.3 NoData NoData
>250 33.5 1.8 43.6 1.3 NoData NoData
Thanks…
Might you provide a link to that data?
These references are now a bit old — but they may help you find more up-to-date data. Good luck.
– “Distributions of firms by size: observations and evidence from selected countries”, Intl. Journal Entrepreneurship and Innovation Management, Vol 8, No 6, 2008. http://www.mang.canterbury.ac.nz/docs/dana/DistributionOfFirms.pdf
– OECD statistics Extracts, http://stats.oecd.org/
– Public sector employment, UK Office of National Statistics, http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-303285
Many thanks
Hopefully the formatting can be improved.
There should be 7 columns of data!
– size of company;
– % employed in Japan;
– % enterprises in Japan;
– %employed in UK;
– % enterprises in UK;
-% employed in USA;
– % enterprises in USA.
I am not sure what you are addressing
Limited Liability Companies “trading” globally like to incorporate in countries where they will have the least liability.
Simplified Overview: This happens in the USA on State-to-State basis. Many USA companies incorporate out of Delaware or South Dakota because the “limited liability” is even less in these states though they have no “functioning offices” or employees” in Delaware or South Dakota.
A good question.
Might startups be exempt for some issues until they reach some pre-agreed limit.
Part of limited liability is to encourage risk taking.
Large companies do need to be held accountable if course.
Why should they take risk at everyone else’s expense?
I should have mentioned it in my original post but clearly incorporation could include the requirement to have proper insurance of other arrangements where appropriate for things like third party liability and clients funds
Ah, wouldn’t you know it, these are ok! Maybe there’s an intermittent problem then…
[…] By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future […]
Richard, you and your wife have an LLP. How does that fit with you stated view here?
Completely.
I did not say limited liability should never be available. I said the case must be made for it. Did you not read what I said?
Do I suspect you might be a troll? I think so……
Footballer more likely than troll. Obviously limited liability is a hot issue for pro footballers.
This discussion needs to include the charge made to set up a company and the lack of policing of companies by Companies House. This has already been addressed by Richard I know but it’s relevant here. Companies House needs to not just be a Registrar but also to have some policing teeth and for this charges need to significantly increase and funding needs to be expanded.
Richard
Limited liability provides a financial firewall at which chains of liability stop, and it exists to protect investors.
But, does anyone need more than one layer of firewall? Can you think of any rational reason why a parent limited company, having invested in a child company, should be protected from the liabilities of that child company? After all, its own shareholders are still protected by its own limitation of liability.
My view is that only shareholders who are natural persons (i.e. actual human people) should be protected by limitation of liability — and, further, that the nonsense notion that corporate bodies can be legally considered to be persons should be abandoned.
Do you agree, and if not, why not?
I agree
I don’t think anyone ever thougth tiers of protectiion shouild be allowed – but it happened