Limited liability has advantages

Press, 19 August 1982, Page 25

Limited liability has advantages

To understand what it is to be a shareholder and to take an intelligent interest in share investment, one should have a fairly clear idea of what a company is. what is the relationship of a shareholder with his companv, (and with the directors) and what is the relationship between the company and the outside world. .

The word “companv” is a vague one and is applied to many associations which are not companies as defined by the Companies Act, i.e. having shareholders and limited liability. Solicitors, accountants, and architects often call themselves "X. Y, and Company,”

but in reality may be only a one-man business? or merely a partnership. By the way, solicitors are prohibited by law from practising as a limited liability company, and barristers may not even practise as a partnership. At the risk of oversimplification. let it be said at once that in a partnership the liability of any partner is not limited: a partner is liable to an unlimited extent not only for his own • share of the debts of the firm but also for the share of his partnerfs) in so far as they are unable to pay their debts. A partnership can have no more than 25 members. The shareholder in a

limited liability company is only liable to the nominal value of the shares he holds, if the company is put into liquidation because it cannot pay its debts.

However ill the company may fare, a shareholder cannot be required to contribute more than the capital he has already subscribed or agreed to subscribe. When the company becomes insolvent, and is "wound up” as it is called (equivalent to an individual’s bankruptcy) all the assets may go to the creditors and the shares may become worthless, but that is the worst that can happen, and no shareholder can be asked, as could a member of a partnership, to make good any deficiency.

There are two types of limited liability company. First, the public company, which must have at least seven shareholders (but may have a million or more) and whose shares are usually listed, that is, traded on b the stock exchange. Nearly all major industrial and commercial companies fall into this class.

Second, the private company. which need have only two shareholders but may not have more than 25. It must not invite the public to subscribe capital and must restrict the right to transfer shares.

The private company has enabled the convenience of limited liability to be shared by small one-man businesses that have formed companies with husbands, wives, and families as the shareholders. The sole trader and the partnership have virtually given way to the private company.