Ownership and Limited Liability
by Manfred Davidmann
- Ownership and Enterprises
- Limited Liability
- Fully Liable for Debts
Limited Liability for Debts
- Customers Losing Out
Misuse by Owners and Directors
Role of Auditors
- Notes <..>
Relevant Current and Associated Works
Relevant Subject Index Pages and Site Overview
This report discusses different types of
enterprises and the extent to which owners are responsible for
repaying the debts of their enterprise.
Also discussed are
disadvantages, difficulties and abuses associated with the
system of Limited Liability, and their implications for
customers, suppliers and employees.
OWNERSHIP AND ENTERPRISES
It is customary to consider the different types of
enterprises by ranking them by what appears to be
according to size.
- The usual list then consists of
- Sole Trader
Considering them in the way they are defined in the UK,
then a sole trader works on his own account. A
partnership generally consists of up to twenty partners.
The Private Company can have up to fifty owners (members)
and its shares are not available to the general public.
The Public Company, however, can have an unlimited number
of owners (shareholders) and its shares are quoted on the
stock exchange and are available to the general public.
Public companies tend to have bigger sales than Private
companies which in turn tend to be bigger than
Partnerships which themselves tend to be bigger than Sole
Traders. However, some Partnerships and some Private
companies are very big indeed.
But ranking types of enterprises in this way misses
really relevant distinctions between different types of
enterprises. And one important characteristic which
distinguishes one kind of enterprise from another is
whether the owners benefit from 'Limited Liability'. <1>
FULLY LIABLE FOR DEBTS
(Having to pay back all one's debts)
People have to pay their debts, that is they are liable
for the repayment of their debts to the full extent of
their means, of their assets. All that one has, such as
savings, investments, furniture, car and home, may have
to be sold to pay one's debts.
In the same way a Sole Trader is fully liable for the
debts of his enterprise. Similarly the partners in a
Partnership are jointly fully liable for the repayment of
the debts of their partnership.
Their possessions may have to be sold to pay the debts of
their enterprises, that is to pay their debts.
But the owners of such enterprises do not need to publish
their accounts and may be able to evade payment of debts
by transferring possessions to relatives or by possibly
removing them from the country's jurisdiction.
LIMITED LIABILITY FOR DEBTS
(Of one's debts, having to pay back no more than a
specified sum which can be much smaller than the debts)
What owners of Private and of Public companies have in
common is that the liability of the owners for the debts
of their companies is limited. Their liability is
limited to the paid-up value of the shares they own and
this means that it is limited to the amount they agreed
to pay for the shares when they bought them.
When a company becomes insolvent, which means when the
company cannot pay its debts, then it ceases to trade
because it cannot pay its way. It is liquidated, that is
its assets are sold and the resulting moneys used to pay
at least some of its debts. The remainder, if any, is paid to its
When companies become insolvent and cease to trade, they
often owe enormous sums which they cannot repay. But the
owner's liability is strictly limited by law to the
amount he agreed to pay for the shares when he bought
them. The owner is protected by law, his personal
possessions cannot be used to repay the company's debts.
So there is now a much greater risk for those dealing
with such enterprises if the enterprise becomes
insolvent. The owners have transferred much if not most
of the risk to suppliers (creditors), customers and
Suppliers may not get paid, customers can lose their down
payments (deposits), customers can be left with worthless
guarantees, employees may not be paid for work done,
other moneys owed by the enterprise may not be repaid.
The amounts involved may vastly exceed the enterprise's
capital, the risk to suppliers and customers is often
great, suppliers and customers lose very large sums each
Hence such enterprises generally have to indicate to
those who have dealings with them that the enterprises'
owners have passed much of the risk to suppliers and
customers, that those dealing with the enterprise may not
be repaid if it ceases to trade.
In the UK, for example, the law requires a company's name
to include specified words, or their specified
abbreviations, which in effect state the type of company
and that suppliers and customers may lose their moneys if
they have dealings with this company. A private
company's name has to end with the word 'Limited' or the
abbreviation 'Ltd'. A public company's name has to end
with the word 'Company' or the abbreviation 'Co'. <3>
In Germany, the letters GmbH are used, for 'Gesellschaft
mit beschraenkter Haftung', that is for a 'company with
limited liability'. 'Inc' denotes a limited liability
company in the United States.
It is because there is risk involved when dealing with
companies that, in the UK, the larger companies also have
to file each year independently audited summary accounts,
as well as information about their directors, with the
Registrar of Companies (and now with Companies House).
This information in this way becomes available to all who
wish to check a company's creditworthiness, performance
But it takes time and money to obtain such information
and knowledge and experience to understand, interpret and
analyse the published information.
Owners take the profits but have transferred much of
their risk to other people, to suppliers, customers and
This benefits the owners but runs counter to the
free-enterprise maxim that owners (capitalists) can earn
profits by taking risks with their own money.
What we see is a system where owners enrich themselves by
using and risking other people's moneys.
Customers Losing Out
Some companies are now so large and so many people have
been affected at once that companies have been compelled
by public pressure to make arrangements for compensating
those losing out. Their trade associations have created
funds for compensating customers for losses incurred as a
result of a trader's insolvency. These funds are formed
and replenished by collecting contributions from the
trade association's member companies.
Trade associations hold funds which are then paid out to
angry customers. The funds are collected from their
member companies. The member companies recover the extra
cost from their customers by increased prices.
Once again we see that owners have passed their risk to
others, have in this way merely spread the losses among
all their customers, are getting their customers as a
whole to pay outstanding debts of insolvency.
Misuse by Owners and Directors
A company may be registered (incorporated), start
trading, become insolvent and cease to trade after having
incurred considerable debts which it cannot repay.
The owners and directors of that insolvent company may
then at small cost register another company under a new
name and continue trading under the new name, with
similar results and more losses to the public.
While directors may be prohibited from holding office in
certain circumstances, it would seem that such provisions
do not at present effectively protect customers,
suppliers and employees.
Role of Auditors
The audit is carried out by an independent person or
partnership having approved qualifications. Their key
role seems to be to ensure that an enterprise's annual
summary accounts present a true and fair view of the
financial outcome of the company's operations and of its
assets, primarily for shareholders.
The appointment of auditors is generally approved by
shareholders at the company's annual general meeting and
auditors' fees are paid by the company. Which means that
auditors may be selected and payment of their fees
authorised by executive directors.
It is executive directors who are responsible for
day-to-day operations and who are in the end accountable, to
the shareholders, for the results obtained by the company.
And some directors may prefer to present their
shareholders, suppliers and customers with a more
favourable view of the company's situation than is
warranted by actual results.
So the role of independent auditors would seem to be a
Owners take the profits but have transferred much of
their risk to other people, to suppliers, customers
What we see is a system where owners enrich
themselves by using and risking other people's
This benefits the owners but runs counter to the
free-enterprise maxim that owners may earn profits
from taking risks with their own money.
While directors may be prohibited from holding
office in certain circumstances, it would seem that
such provisions do not at present effectively
protect customers, suppliers and employees.
This is not really an acceptable situation.
|Enterprises whose owners have
limited liability are called companies in the United Kingdom and
corporations in the United States.
Suppliers provide goods and services on credit, which means
they get paid some time after the date on which the goods or services
were provided, say two months later. If the company which is their
customer becomes insolvent and ceases to trade, the supplier will not get
paid for the goods and services he has already provided. He may be lucky
and receive a part of the money owed to him but on the whole it is the
supplier whose money is at risk and who loses out if the company becomes
insolvent. Hence risk has been transferred by owners (shareholders) to
Customers make advance payments to secure goods and
services. If the company ceases to trade before these goods or services
are provided, the customer is likely to lose all of his deposit.
Similarly guarantees for goods bought or services provided are likely to
be worthless if the company ceases to trade before the guarantee expires.
The amount lost by customers at the present time in such ways in the UK
is apparently of the order of £18 million each year.
Employees also lose out if a company becomes insolvent.
Salaries, wages, holiday entitlement and redundancy compensation can be
lost, quite apart from the social costs of the resulting unemployment to
employees and to the community.
Banks also lose out when companies become insolvent. But
banks are regarded as having much expertise in assessing the risks they
take when lending money to their customers including companies. Assessing
such risks is their business and they are paid for the risks they take by
the interest paid to them for the loans they make.
| Recently changed so that a private
company's name now ends with the words 'Company Limited' or the
abbreviation 'Co Ltd'. A public company's name now ends with the words
'Public Limited Company' or the abbreviation 'PLC'.
|A list of other
relevant current and associated reports by Manfred Davidmann:
Style of Management and
|Major review and
analysis of the style of management and its effect on management
effectiveness, decision taking and standard of living. Measures of style
of management and government. Overcoming problems of size. Management
effectiveness can be increased by 20-30 percent.
Role of Managers Under
Different Styles of Management
| Short summary of
the role of managers under authoritarian and participative styles of
management. Also covers decision making and the basic characteristics of
Directing and Managing
How to plan ahead, find best strategies, decide and implement, agree targets and objectives, monitor and control progress, evaluate performance, carry out appraisal and target-setting interviews. Describes proved, practical and effective techniques.
summarises past work in Motivation. Provides a clear definition of
'motivation', of the factors which motivate and of what people are
striving to achieve.
The Will to Work: What
People Struggle to Achieve
| Major review,
analysis and report about motivation and motivating. Covers remuneration
and job satisfaction as well as the factors which motivate. Develops a
clear definition of 'motivation'. Lists what people are striving and
struggling to achieve, and progress made, in corporations, communities,
Work and Pay
| Major review and
analysis of work and pay in relation to employer, employee and community.
Provides the underlying knowledge and understanding for scientific
determination and prediction of rates of pay, remuneration and
differentials, of National Remuneration Scales and of the National
Remuneration Pattern of pay and differentials.
Work and Pay: Summary
|Concise summary review of whole subject of work and pay, in clear language. Covers pay, incomes and differentials and the interests and requirements of owners and employers, of the individual and his family, and of the community.
Exporting and Importing of
Employment and Unemployment
exporting and importing of employment and unemployment, underlying
principles, effect of trade, how to reduce unemployment, social costs of
unemployment, community objectives, support for enterprises, socially
irresponsible enterprise behaviour.
Transfer Pricing and
| One of the most
controversial operations of multinationals, transfer pricing, is clearly
described and defined. An easily-followed illustration shows how transfer
pricing can be used by multinationals to maximise their profits by tax
avoidance and by obtaining tax rebates. Also discussed is the effect of
transfer pricing on the tax burden carried by other tax payers.
Inflation, Balance of Payments and Currency Exchange Rates
|Reviews the relationships, how inflation affects currency exchange rates and trade, the effect of changing interest rates on share prices and pensions. Discusses multinational operations such as transfer pricing, inflation's burdens and worldwide inequality.
review. Outstanding is the section on functional relationships. Shows how
to improve co-ordination, teamwork and co-operation. Discusses the role
and responsibilities of managers in different circumstances.
Profits and Social Accountability
disasters and catastrophes are here put together as individual case
studies and reviewed as a whole. We are facing a sequence of events which
are increasing in frequency, severity and extent. There are sections
about what can be done about this, on community aims and community
leadership, on the world-wide struggle for social accountability.
Social Responsibility and Accountability: Summary
|Outlines basic causes of socially irresponsible behaviour and ways of solving the problem. Statement of aims. Public demonstrations and protests as essential survival mechanisms. Whistle-blowing. Worldwide struggle to achieve social accountability.
Co-operation: Causes of Failure, Guidelines for Success
|Based on eight
studies of co-operatives and mutual societies, the report's conclusions
and recommendations cover fundamental and practical problems of co-ops
and mutual societies, of members, of direction, of management and
control. There are extensive sections on Style of Management,
decision-taking, management motivation and performance, on General
Management principles and their application in practice.
Using Words to Communicate
| Shows how to
communicate more effectively, covering aspects of thinking, writing,
speaking and listening as well as formal and informal communications.
Consists of guidelines found useful by university students and practising
middle and senior managers.
Community and Public
| This report
objectively evaluates community ownership and reviews the reasons both
for nationalising and for privatising. Performance, control and
accountability of community-owned enterprises and industries are
discussed. Points made are illustrated by a number of striking
Ownership and Deciding
Policy: Companies, Shareholders, Directors and Community
| A short statement
which describes the system by which a company's majority shareholders
decide policy and control the company.
Creating, Patenting and Marketing of New Forms of Life
|Evaluates problems in genetic manipulation, and consequences of private ownership of new life-forms by multinationals. Lists conclusions and recommendations about man-made forms of life, their ownership and patenting, about improving the trend of events.
The Right to Strike
| Discusses and
defines the right to strike, the extent to which people can strike and
what this implies. Also discussed are aspects of current problems such as
part-time work and home working, Works Councils, uses and misuses of
linking pay to a cost-of-living index, participation in decision-taking,
upward redistribution of income and wealth.
Corrupted Economics and Misleading Experts
|Shows how 'Economics' is used to misinform and mislead the general public. Clearly states underlying considerations of specific important economic relationships and comments on misleading political interpretations and on role of independent experts.
Reorganising the National Health
An Evaluation of the Griffiths Report
|1984 report which
has become a classic study of the application and effect of General
Management principles and of ignoring them.
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The Site Overview page has links to all individual Subject Index Pages which between them list the works by Manfred Davidmann which are available on the Internet, with short descriptions and links for downloading.
To see the Site Overview page, click Overview
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Copyright © 1991, 1996 Manfred Davidmann
All rights reserved worldwide.
02/05/96 To Website
02/06/02 Added 'Relevant Current and Associated Works'
Updated 2021 - the following links were added:
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