Limited Liability

   The status of limited liability gives a business a legal personality separate from that of its shareholders and limits the liability of shareholders for the debts incurred by the business, normally to the amount of their investment. The development of limited liability laws facilitated the growth of joint stock companies owned in the main by nonactive shareholders: a shareholder knew that his potential losses in the event of business failure were limited to the amount of his investments and had legal protection against being pursued at law for debts incurred by a company whose daily operations he knew little about. By removing a powerful disincentive to investment, limited liability laws mobilized large amounts of capital, including the savings of small investors.

   Although limited liability companies had long been known before the passage of limited liability laws, the status had required a special charter, granted by the crown or a legislature, similar to those granting monopolies or other privileges to entities such as the British East India Company. In Britain a Limited Liability Act of 1856 made the status generally available; in the United States corporate law was generally a state matter, and limited liability laws were often resisted until the late nineteenth century. Limited liability principles became part of the Prussian Commercial Code in 1861 and then spread quickly to other German states; France passed similar laws in 1863 and 1867. Because such laws stimulated investment by the growing European middle class, they put an enormous pool of capital at the disposal of overseas investment and thus contributed to intensified imperial competition in the second half of the nineteenth century.

   See also <>.

   FURTHER READING:

    Ferguson, Niall. The Cash Nexus: Money and Power in the Modern World, 1700–2000 . New York: Basic Books, 2002;

    Freedman, C. E. Joint Stock Enterprise in France, 1807–1867: From Privileged Company to Modern Corporation . Chapel Hill: University of North Carolina Press, 1979;

    Hunt, B. C. The Development of the Business Corporation in England, 1880–1867 . Cambridge, MA: Harvard University Press, 1936.

   MARK F. PROUDMAN