Business Shareholders and Personal Liability

What are the benefits to the commerce of having shareholders—and other entities that shield their members—protected from personal liability?

The following are the benefits to the commerce of having shareholders and other entities that shield their members from personal liability. (1) When a company shields its shareholders from personal liability, it acts as a way of making the management and the general shareholders responsible as they are the ones who make all the decisions in the business entity. (2)To an investor, limited liability is the motivation as the limited liability principle clearly states that the assets of a shareholder are separate and distinct from the company’s assets. This, therefore, acts as a protector of the shareholders’ investment, and it motivates the investor to purchase shares. (Bourne, 1998)

(3)Inexperienced investors also gain from this principle, as they are able to invest their funds and get back their benefits without having to worry about management roles and risks of losing their investment. (4) The limited liability principle allows companies to raise capital, which is used to create new business entities. The new companies earn funds for their investors, generate tax for the governments, and create employment. (5) The limited liability principle also helps save an investor’s time by making shareholders liable for all the company’s actions and debts, meaning that they must be involved in making all the company’s decisions. The fact that companies have hundreds or thousands of shareholders would make it exceedingly difficult and time-consuming to get the opinion of each shareholder. (Bourne, 1998)

(6)The limited liability principle has led to the development of the share market in which limited liability shares are traded to the public; the investors in the market do so, bearing in mind that the risk of losing their investment is minimal. (7) Another benefit of the limited liability principle consists in the fact that it transfers the risk from shareholders to the company’s creditors, who have the ability to bear it.

This is beneficial to both the creditors and the shareholders because the shareholders do not have to waste their time managing the company’s business, and the creditors, on the other hand, have the chance to monitor the company’s progress as they protect their interests. (8)Finally, limited liability is a mechanism for the promotion of diversification of shareholding; this simply means that shareholders tend to invest in many companies as a way of minimizing the risk of decline in the market value of shares. (Bourne, 1998)

Would commerce be better served if personal liability would attach to those individuals for the misdeeds of their entity? Why or why not?

Yes, because by holding individuals accountable for their deeds and acts, there will be minimal acts of irresponsibility, which can lead to conflicts in the organization. Secondly, if employees receive immunity from responsibility, reckless actions will occur, which can cause harm to the company’s financial positioning cases of theft of the company’s property and misinformed decision making by the management.

Employee’s recklessness can also affect both the company’s employees and their customers; for example, poor quality work and unkind employees can lead to loss of business and profitability. Thirdly, holding individuals responsible, in this case, the ones who make decisions in the firm will help in making them more cautious and considerate in their approval and enactment of risky transactions, which can affect the company’s financial position. (Paine, 2003)

However, personal liability cannot be applied to situations in which employees are held accountable for the personal actions of their fellow team members unless they are personally involved since by doing so, one will be punishing people for acts they are not aware of.

References

Bourne, N. (1998). Principles of company law (3rd ed.). London: Cavendish.

Paine, L. S. (2003). Value shift why companies must merge social and financial imperatives to achieve superior performance. New York: McGraw-Hill.