The Concept of Limited Liability
An Acceler8now.com Investing Education Resource September, 2007
One of the key formats of business registration in Nigeria is full incorporation, which is the registration of the business as a corporate body. The corporate body or 'body corporate' as it is called, is a unique legal entity, much like a person, though a business. Such entity is technically a juristic person, recognised in law, as different from the promoters or owners of the business. A body corporate, say, Dynamic Camtech Limited, can sue and be sued in its name, own assets, execute contracts and enjoy a few other rights available to natural persons. It similarly has corresponding obligations.
The Idea of Incorporation
Two major variants of the corporate body are the public limited company ('plc') and the private limited company ('ltd'). As the name shows, the plc is a public company, simply meaning that its shares are opening traded (there are requirements for attaining that status). The other is a restricted private ownership business, which means you cannot freely join the company. However, what is of the most interest here is that both forms of business enjoy 'limited liability'. That means that when you are an owner in a business under any of the two categories, you personally enjoy limited liability, a very important legal concept in business ownership. So, what is limited liability?
Limited Defined
There, in the eastern part of Nigeria, dominated by business people as you well know, the idea of 'limited' has always been respected, even revered. Strangely, it once assumed this notion of a reflection of the financial status of a business person. When you became 'limited', you had arrived, as you would be commanding container shipments of goods at regular intervals. The protective ingredient of that concept was missed out and many usually thought they didn't qualify to register a limited liability company, if the were not yet super-rich. Well, incorporation as a limited liability company, whether public or private, is a unique company form that separates the person of the business from that of the owners. Following from that, it confers limited liability on the owners' individual persons by limiting their potential liability or, if you like, maximum obligation, to the business to the amount of the share capital they have contributed to the business. That includes any called up share capital: if share payment has been called up, the shareholder has a liability to contribute his part.
What it Means
Elaborating on this, limited liability says that if you have paid up your share contribution, that ends your potential liability to the business. You cannot be compelled, for instance, to use personal resources to meet the obligations of the business. If the business fails and cannot find enough resources to settle its indebtedness to other parties, nobody can, under the law, descend on your personal possessions to meet the obligations of the business or otherwise require you to personally pay them. When you join a limited liability business, you are, ab initio, drawing a line between you and the business. You are defining how much exposure or commitment you want to take. Parties who do business with the company are expected to know that they are dealing with the company, not you. They won't be banking on your personal assets as a security for exposures they take against the business. An exception is if you have personally guaranteed a debt. Wonderful protection, you see. That is why companies that have such status are required to clearly indicate so in their names, for other parties to beware. Public limited companies use 'public limited company' or 'plc'. Private ones use 'limited' or 'ltd'. In the US, 'inc' and 'LLC' are the tags to watch for, just as GmbH, in Germany, should warn you that it is a 'company with limited liability'.
Limited Liability for Shareholder
The import of all this is that when you buy shares and become a shareholder and part-owner of a company, you also enjoy limited liability. That is the case for all shares of public quoted companies you buy from the stock exchange. It means that your 'potential loss' to the business, in the worst case, is the amount you invest in buying the shares. Should the business fail, for instance, shareholders will not be required to raise money to pay its creditors or have their personal assets seized to repay debts. It easily gives a limited scope to the risk you have taken. To appreciate the value of this legal concept, just imagine for one minute what would have been the case if, as a shareholder who is nowhere near where the business is run or in any way involved in the day-to-day operations of the company, you are suddenly called up to pay debts you didn't know how they were incurred. With limited liability, you pay for shares and that's it. That's the highest loss you can incur for the business.
So, if you ever worried about investing in a business that you won't know how it is run and feared that this could land you in unexpected financial trouble, don't let that stop you from buying company shares. The law protects you by limiting the potential liability to you. Besides the fact that most public companies are well-run and closely regulated, there is a line between your personal possessions and the business itself.
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