Limited Liability concept which is applied in the company is relative a concept of modern day enterprises. The concept was first established in the case of Simon v. Simon wherein which says that the liability of a shareholder should be limited to his shareholding in the company and his personal assets must not be used to satisfy the creditors of the company.
This concept protects the investor in terms of investing in the company without having a fear about their personal assets being compromised. This concept helps the investor but can have a negative impact on the creditors and other stakeholders of the company as the debt provided by them to the company is at risk. Keeping in mind the above knowledge, in this article we will discuss about the concept of limited liability from both the legal and economic point of view and analyse the pros and cons of it.
LIMITED LIABILITY AND LEGAL PERSPECTIVE
If we look at the legal perspective of the concept of the limited liability we can see that it is somewhat a new concept in India which came in the form of Limited Liability Partnership Act,2008. Previously, we used to have the concept of limited liability in Companies Act too but after the insertion of a specific act for the same this type of entities which in a way is a hybrid of companies and partnerships, the concept have been developed in a structured form. We will here discuss how the concept has been developed in India through legal provisions and how far they are advantageous in order to further develop the law.
First of all, the LLPs formed under the Act have a separate legal entity and perpetual succession. In this, while the liability of the LLP is unlimited but the liability of its partners is limited to the extent of their shareholding in the company. Also, the partners would not be liable for the negligence or misconduct of the remaining partners.
The advantages of LLPs if we look at the legal procedures involved are very wide.
(a) Less Complicated Procedures: There are minimum requirements in order to register a LLP as only two things are required to be filed, which are, the annual returns and the statement of solvency. Also, unlike a company, a LLP is not required to arrange the meetings as required under the Companies Act.
(b) Less Costly Registration: Although the procedure under the LLP Act is similar to the procedure under Companies Act but the procedure is less costly as compared to the same under the Companies Act.
(b) Tax Benefits: Under the Companies Act, the company is liable to pay Dividend Distribution Tax but the same is not required to be paid by the LLP.
LIMITED LIABILITY AND ECONOMIC PERSPECTIVE
The reason wherein more and more enterprises opted for the limited liability entities as compared to the unlimited liability is not only due to less complicated legal procedures but the concept of limited liability also have an economic advantage to it.
Generally, there are two major entities involved in any modern day enterprises i.e., the shareholders and the creditors. If we talk about the shareholders, the concept of limited liability have a positive economic effect on them as now their personal assets are not at stake if the company faces any financial crisis. This reassurance motivates the shareholders and also the prospective investor to contribute more and more capital into the company which in larger point of view helps in economies of scale.
On the other hand if we talk about the perspective of creditors, they have to bear all the negative costs of this concept of limited liability because the amount which the company owes to them is now not available to be derived out of the assets of the shareholders. Also, the shareholders are involved in the company’s affairs and have a say in the major decision taken by the company which have an impact on the profits or the ultimate bankruptcy of the company but the creditors who have no say in the key decisions of the company have to face the heat if the decisions taken by those shareholders prove to be non profitable for the company. So, the limited liability on one hand benefits the shareholders but on the other hand it puts the creditors in a very disadvantageous position.
REFERENCES:
- Sam Price, Limited Liabiliy: An Economic and Moral Consideration, https://sites.google.com/site/349924e64e68f035/issue-4/limited-liability-an-economic-and-moral-consideration
- Rui-Na Liu, An Economic Analysis on System of Limited liability, atlantis-press.com/php/download_paper.php?id=25857342
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