Limited Liability: Large Company Theory and Small Firms

Abstract

Current enthusiasm for the ‘enterprise culture’ results in strong support for easy access to limited liability forms of business organisation. This has manifested itself in the creation of new limited liability vehicles such as the LLC and the LLP. The UK Company Law Review is examining ways of enhancing the attractiveness of the limited liability company to small business owners. This article examines the claims made for the ‘efficiency’ of limited liability and the applicability of these claims to small firms. It raises the importance of taking into account public policy issues beyond economic efficiency when considering the degree of risk taking and shifting to be encouraged. The article concludes that, although it is difficult to find rational methods of restricting access to limited liability, it does not follow that limited liability should be positively encouraged for all small firms. It is important to signal the limitations of limited liability.