COMMUNITY ECONOMICS


Ownership and Limited Liability

by Manfred Davidmann


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CONTENTS

Summary
Ownership and Enterprises
Limited Liability
Fully Liable for Debts
Limited Liability for Debts
Customers Losing Out
Misuse by Owners and Directors
Role of Auditors
Conclusions
Notes <..>

Relevant Current and Associated Works

Relevant Subject Index Pages and Site Overview



SUMMARY

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
Partnership
Private Company
Public Company.

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>



LIMITED LIABILITY


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 owners.

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 employees. <2>

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 year.


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 and progress.

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 employees.

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 difficult one.



CONCLUSIONS

  1. Owners take the profits but have transferred much of their risk to other people, to suppliers, customers and employees.

    What we see is a system where owners enrich themselves by using and risking other people's moneys.

    This benefits the owners but runs counter to the free-enterprise maxim that owners may earn profits from taking risks with their own money.

  2. 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.

  3. This is not really an acceptable situation.



NOTES

<1>     Enterprises whose owners have limited liability are called companies in the United Kingdom and corporations in the United States.
     
<2>  

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 suppliers.

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.
     
<3>   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'.



Relevant Current and Associated Works

A list of other relevant current and associated reports by Manfred Davidmann:
     
     
Title   Description
     
Style of Management and Leadership     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 each style.
     
Directing and Managing Change     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.
     
Motivation Summary   Reviews and 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, countries.
     
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   Discusses 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 Taxation   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.
     
Organising   Comprehensive 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.
     
Social Responsibility, Profits and Social Accountability   Incidents, 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-operatives and 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 Effectively   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 Ownership   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 case-studies.
     
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 Service:
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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Relevant Subject Index Pages and Site Overview


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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History
03/09/91 Completed
02/05/96 To Website
02/06/02 Added 'Relevant Current and Associated Works'

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