The financial crisis and the statute of small and medium enterprises in the UK have created an important debate on the position of the large-scale investors, especially towards the limited liability concept.
The economy climate is extremely tense after the debacle with the crisis that hit the world in 2008. Therefore, the consequences are noticeable in the way large-scaleinvestors are pointed.
Limited liability companies are therefore criticized as being advantageous for the large-scale investors. However, it is important to notice that this critic is not founded since the origin of its implementation is actually the criticism.
We will thus see what exactly means the limited liability concept, then, the reasons why it is criticized and finally how this criticseems to be unfounded.
Limited Liability Company
What is a limited liability?
When limited liability is involved in a company, it clearly means that shareholders are not obliged to pay more than is due to purchase their shares even if the company cannot pays its debts. (DIANE)
For a very long time it was complicated for the shareholders not to be involved when a company wound up. Accordingto Diane and Koutsias, the limited liability corporation is the greatest single discovery of modern times.
What is a limited liability company?
Limited liability companies are companies where the members’ liability is limited. Indeed, their contribution to the debts of the company is limited.
It exists two types of limited liability: by share and by guarantee.
If it is limited byshares, which is the most common form of company, the liability of each shareholder is limited to the amount individually invested (BOURNE). If it is limited by guarantee, which is commonly used for non-commercial purposes, the members guarantee the payment if certain amounts if the company goes into insolvent liquidation.
Before the Company Act 2006, it was possible for a company to be limited byguarantee and having a share capital to provide working money.
The reasons why it is criticized
First of all, it is important to understand that large-scale investors are more likely to have advantage on the smaller investors.
Indeed, large investors are more powerful. They can provide a solid background thanks to their experience. Besides, they are recognized as more valuable.
A largeinvestor can be more credible; it is obvious that a company would be more interested in a more credible investor. For example, a company, which is on a stock exchange market, can prove that it is reliable. The credibility of the investor is an important factor when the company looking for an investor is going to choose the best one. They don’t want to enter a contract with an investor that can’tcompletely compete with others that have a bigger power and influence.
Besides, it is important to understand their power of negotiation. Indeed, because they are more powerful, they will be more able to negotiate secured terms. Indirectly, they can put pressure on the negotiation. A small investor cannot compete, and even if it does have some shares, they might not be as considerable as thelarger one’s. So they won’t be as powerful when they will be consulted.
A company in a need of money, and which chooses investors over a bank, will have to consider their investors according to different factors. A limited liability is advantageous for the company because the shareholders won’t be involved in the managerial directions. It is better to get a large amount of money from a morecredible investor rather than a small one that may not provide enough money. If they can’t, the company will have to get different investors, which is more complicated.
It is obvious that large-scale investors can give more securities, and can influence the company seeking for money.
Another advantage is that they are engaged only on the amount of the investment. According to Dine J. & Koutsias...
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