Introduction
In today's economic climate, a limited liability company (whether public or private) or a limited liability partnership ("LLP"), depending on business circumstances, is as much of a necessity as having a mobile phone or an iPod. The setting up of a limited company or LLP is relatively cheap and a fairly painless experience, and contains a number of benefits for those who want to limit their potential financial exposure when doing so.
When turning to the news, one can't avoid references to a global recession. Notable economic figures can't help but voice alarm about the severity of the recession. Alan Greenspan, the former Chairman of the Federal Reserve of the United States from 1987 to 2006, in his speech to Congress on 23 October 20081 stated "we are in the midst of a once in a century tsunami". Mr Greenspan went further, "the crisis is much broader than anything I could have imagined. It has morphed from one gripped by liquidity restraints to one where fears of insolvency are paramount".
The severity and nature of the recession has had a huge impact upon:
- unemployment in the United Kingdom ("UK"), which has risen to 7.1%2;
- the FTSE 100 (which lists shares of the top 100 UK listed companies on the London Stock Exchange). The FTSE 100 has dropped from 6,191.61 on 20 May 2008 to 4,468.41 on 20 May 20093;
- the strength of GBP (£) against the USD ($), which on 23 January 2009 had dropped to 1.36306 when it had been approximately 2.01 in 2008; and
it has claimed a number of famous high street stores and, one can't forget, led to the nationalisation of Northern Rock and part nationalisation of Royal Bank of Scotland and Lloyds TSB.
The recession has laid claim to large number of institutions and is also, using Mr Greenspan's analogy to that of a tsunami, consuming small to large scale companies too. Companies House as of 3 May 2009 states that there are 2,147,1394 active companies in existence. The Insolvency Service statistics released for the first quarter of 2009, show that there were 4,941 compulsory liquidations and creditors' voluntary liquidations in England and Wales, an increase of 56.0% on the same period a year ago5. 4,941 for the first quarter of 2009 seems like a small figure when compared against 2,147,139 companies in existence but, when compared with previous years, for example, in the first quarter of 2007 where there were 3,113 liquidations in England and Wales6 and the first quarter of 2005 where there were 2,900 liquidations in England and Wales7, the figures are quite alarming. When comparing the statistics of 2009 and 2005, there has been a 70.3% increase in the number of liquidations.
Limited liability and separate legal personality
As long ago as 1855, the Limited Liability Act permitted the creation of a company which had a limited liability. The concept of limited liability, for example, in the situation of a liquidation, means that a member's liability is separate from that of the company's, subject to certain exceptions8.
The doctrine of limited liability was firmly established in Salomon v A Salomon & Co9. In this case, Aron Salomon, a leather and boot maker, had for thirty years traded under the name of A Salomon and Co (the "Company"). The Company was suffering from a downturn in business, and so Mr Salomon sought to take advantage of the limited liability principle, by creating a limited company. Having successfully set up a limited liability company, the market deteriorated further, and the Company was eventually wound up.
The Court of Appeal had decided that Mr Salomon was liable to indemnify the unsecured creditors personally. Finally, the House of Lords reversed the Court of Appeal's decision and held that the Company had been validly set up as a limited liability company and, with that in mind, it had a separate legal personality from the majority shareholder, Aron Salomon, and the company's debts and property were its own.
Conclusion
There have been various suggestions since Labour's budget announced on 22 April 2009 that the economy will begin to improve by the end of 2009. However, Mervyn King, the governor of the Bank of England, following on from the Bank of England's Inflation Report released on 13 May 2009, cut his economic recovery growth forecast as he stated "there are pretty solid reasons for supposing that there will be a recovery next year, but also pretty solid reasons for questioning if that will be sustained". In his view, the current recession is like no other, as in past recessions, following a bust there is a boom. Mr King confirmed that the recovery would be different to previous recoveries following a bust as "the prospects for economic growth remain unusually uncertain...this is not like the typical business cycle of the post-war period."
With the current uncertainty about when the recession will end, the benefit of having a limited liability company or LLP in today's economic climate cannot be underestimated. The political party, who supported the Limited Liability Act 1855, appreciated the need to facilitate entrepreneurialism, and saw limited liability as a vehicle for doing so.
The government wants entrepreneurs to take risks and generate higher revenues, as it will seek to recoup some of these higher revenues through various taxes.
It would be sensible for business owners to take advantage of the limited liability principle. This would give them added protection and help prevent them having to dip into their own personal wealth to finance their business which owes vast amounts to various creditors.
Footnotes
1 http://news.bbc.co.uk/1/hi/business/7687101.stm
2 http://www.statistics.gov.uk/cci/nugget.asp?ID=12
3 http://www.londonstockexchange.com/LSECWS/IFSPages/HistoricalChartPopup.aspx?sym=1191205.FTSE
4 http://www.companieshouse.gov.uk/about/busRegArchive/statsApr09.pdf
5 http://www.insolvency.gov.uk/otherinformation/statistics/200905/index.htm
6 http://www.insolvency.gov.uk/otherinformation/statistics/200704/index.htm
7 http://www.insolvency.gov.uk/otherinformation/statistics/200505/index.htm
8 Including, but not limited to, Misfeasance, Fraudulent Trading and Wrongful Trading (respectively section 212, 213 and 214 of the Insolvency Act 1986)
9 [1897] AC 22
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.