Legal liability and legal status

Most large commercial companies are limited by share and must include ‘limited’ or ‘plc’ as appropriate in their name. This acts as a warning to those trading with such a company because any debts it incurs from trading may not be recoverable due to the limited liability of its owners (shareholders).

Where a limited company cannot pay its debts from its own financial resources, it cannot make the owners use their personal finances to meet these debts. Sole traders and partnerships have unlimited liability: if business debts cannot be met from the firm’s own resources, the owner(s) can be forced to sell personal assets to cover these business debts.

Limited liability encourages greater investment than would otherwise take place, and ensures a demand for stocks and shares.

Other companies, for example some examination bodies and professional associations, are limited by guarantee; members of such a company guarantee its business debts, up to a given maximum.

KEY POINT The benefit of limited liability to the economy is that it encourages people to risk owning and/or investing in companies, because they know their liability (losses) will be limited to the amount they have agreed to invest.

Another important difference between these forms of business ownership is in their legal status. Limited companies are incorporated bodies. ‘Incorporation’ means that a company has a separate legal existence from its members (shareholders). Sole traders and partnerships are unincorporated businesses and do not have a legal existence that is separate from that of the owners.

A limited company has the legal authority to:

• own property
• enter contracts in its own name
• sue (and be sued) in the courts.