Limited Liability in a Company Essay Example | Topics and Well Written Essays - 1250 words

Limited Liability in a Company - Essay Example The word limited indicates that the liability of members in respect of company’s debts and other liabilities is limited to amount contributed or undertaken by the member to contribute in respect of share capital of the company. Limited liability protects shareholders against any financial loss exceeding the investment4. It has been termed as the greatest single discovery of modern times, even more than steam and electricity.5 As per Ross Grantham and Charles Rickett6, there are certain economic justifications for such restriction of liabilities of a member of a limited body corporate. The limited liability reduces the shareholders’ responsibility to monitor corporate managers because the financial consequences of company failure on shareholders are limited. Corporate managers work efficiently for profit maximization because limited liability induces free share transferability that would force shareholders to withdraw funds from unprofitable ventures. Directors who run the company can take risky decisions as well as they aware that shareholders have nothing at stake.7 That is why Tony Orhnial8 states that limited liability ‘is not related to company structure but to the business’s economic risks, and is instrumental to the encouragement of entrepreneurial risk bearing and innovative attitude’. The principle of creating a limited liability company is that debts in case of failures cannot be carried back to founders9. Limited liability works as an extra non- taxable incentive for investments besides dividends and capital gains on transfers of shares that are taxable. Moreover, the attribute of ‘limited liability is quite significant when work locale, machinery, chemicals, or even artwork are potentially hazardous’10 Limited liability has helped to develop public share market.11 The primary objective of limited liability is to  encourage investment by the public in risk-taking enterprises by insulating the investing public from debts of the enterprise.