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An analysis of the importance of the existence of limited liability companies in the 21st century

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  1. Introduction
  2. The guiding principle of competitiveness of UK companies
  3. The concept of limited liability
  4. Why limited liability?
  5. Areas of concern
    1. Moral hazard
    2. Immorality
    3. Closely held companies
    4. Groups of companies
    5. Tort creditors
  6. Current regulation and the need for reform
    1. Rules related to share capital
    2. Imposing liabilities on managers or shareholders
    3. Judicial veil piercing and group of companies
    4. Small businesses, tort creditors: Revolutionary reforms?
  7. The way ahead
  8. Conclusion
  9. Bibliography

It is the aim of this paper to analyze the importance of the existence of limited liability companies in the 21st century, as a means of fostering entrepreneurial spirit, and to argue that while the above aim is regarded as essential in the market economy, there is invariably a need for a clear and precise framework through which the principle should apply. The potential abuse of the limited liability principle requires a careful consideration when deciding about the appropriate level of regulation.

The guiding principle of competitiveness of UK companies and the emphasis on the construction of a legal system that has an advantageous framework of company law and will allure businesses to it, as evidenced in the Company Law Review: Final Report , needs to be balanced with the guarantee that sensible prophylactic measures are taken by the legislator to avoid misuse of the principle. The need to attract more businesses does not justify an extremely lax application of the limited liability principle.

[...] Milman David, ?Groups of companies: the path towards discrete regulation? in Milman David (ed.) Regulating enterprise: law and business organisations in the UK, (1999) Oxford Hart. However, Posner holds that the imposition of unlimited liability would result in a growth of information costs since the creditor would have to investigate the economic situation of the other companies in the group (Posner R., n 19 above) Collins Hugh, ?Ascription of legal responsibity to groups in complex patterns of economic integration? (1990) 53 MLR 731. [...]

[...] The formal introduction of the twin principles of incorporation and limited liability led to the establishment of companies as the major instrument in economic development and contributed to the evolution of commerce and arguably to world prosperity[9]. III. Why limited liability? The major contribution of limited liability is that it supports the investor to invest its capital into dynamic business without worrying that he will incur further liability. The economic theory of the firm, which explains the company as a nexus of contracts joining inputs to produce outputs[10], has provided a solid base for the appraisal of limited liability. [...]

[...] iv) Groups of companies The limited liability principle may have adverse effects also in the case of corporate groups. As Easterbook and Fischel admit, the potential moral hazard is intensified in this case. The parent company may use the subsidiary as a means of engaging in risky ventures without being responsible for the actions of the latter[29]. It may often be the case that the subsidiary will be undercapitalized and it will not operate on a profit-making basis, with effect of transferring uncompensated risks to creditors[30]. [...]

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