Limited Liability Companies

The most significant difference between the types of business entity considered so far and their larger counterparts is the concept of limited liability. In the United Kingdom the Limited Liability Company can be identified by the abbreviation Ltd (Limited Company) or plc (Public Limited Company) following the company’s name. Company Law is complex and differs from country to country worldwide, but broadly
speaking the Private Limited Company and the Public Limited Company can easily be distinguished in any part of the world. Let us remind ourselves what is meant by limited liability. Such a company is owned by shareholders and each shareholder is liable for the company’s debts only up to the value of the shares he or she holds. That means, in the unfortunate event of the company becoming insolvent, the shareholders may indeed find their shares worthless but they would not be required to dip into their pockets for additional funds to meet the balance of the company’s indebtedness. (The exception here would be if the shareholders had only subscribed part of the cost of their shares; they would have to pay the remaining installment to the liquidator in the event of insolvency). The result would be that those people who had granted credit to the failed company would only receive a proportion (occasionally only a minuscule proportion) of the amount owed to them. This may sound as though a limited liability company provides a licence for the directors and staff to have fun with other peoples’ money without any responsibility. This, of course, is not so and in every country there are laws which give protection to the shareholders generally, and to minority shareholders against the majority. Some protection for creditors is afforded by the requirement for limited companies to have their accounts carefully checked (audited) by an independent professional accountant. When the auditor is satisfied, a Profit and Loss Account (which sets out the company’s income and expenditure for the last year) and a Balance Sheet (which
shows what assets and liabilities, the company had at the end of that year) have to be distributed to every shareholder and also lodged with a government agency. In the UK this is the Registrar of Companies and for a nominal sum, anyone may obtain comprehensive details of any limited company’s structure as well as copies of its annual accounts. It has, however, been said that a company’s annual accounts are like
a scanty swimsuit – what they reveal is interesting but what they conceal is vital. In other words there is no substitute for prudence when dealing with a limited liability company because large as well as small companies have been known to become insolvent.