Journal Of Business Law: Economics For Business

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Journal Of Business Law: Economics For Business

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Journal Of Business Law: Economics For Business

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Question:
Why were limited liability companies developed? Could a modern global economy be run on the back of partnerships?

Answer:

Introduction
Liability is said to be limited when a person’s pecuniary responsibility, in relation to his investment in a company or partnership is limited to a fixed amount. In case a limited liability is sued, then the company is sued as a separate legal person and not its directors or shareholders. The member’s responsibility is limited as far as the actions of the company are concerned but the members may be held liable for their own actions.
Reasons why Limited liability Companies were developed
The basis on which limited liability companies were incorporated was that all debts incurred by the company are to be borne by the company itself. The directors or the shareholders of such companies are not to be held directly liable. These types of companies work on the principle that a company is a separate legal entity. The debts incurred by the company are its own liabilities. In the United Kingdom Limited Liability Partnership was introduced through the Limited Liability Partnership Act, 2000 and Limited Liability Partnership Regulations, 2001. In United Kingdom members of a Limited Liability Partnership might agree in their agreement to bear joint liable but can in no way held severally liable. This seems to be the prime reason for incorporation of these companies. Businesses in the United Kingdom had for long campaigned for changing rules relating to liability. Since the government was scared of the fact that businesses would move out, in case they are not given the status of limited liability, LLPs were introduced in United Kingdom.
Another important reason was that incorporation of these companies were comparatively cheaper and it was presumed that these types of companies would be business friendly.[1]

Whether a modern global economy can be run on the back of partnerships
In case of partnership ownership of a business is divided amongst two or more persons. It allows more people to participate in the business which in turn brings in more capital and also brings in great expertise. Profits earned by a partnership business with unlimited liability are taxed as the income of the members. Since all members are at risk of losing money, in case the business incurs losses, the members would be more interested in running the business successfully as compared to limited liability partnership where the liability of the members is limited. Creditors would not be entitled to any claim on personal property of the members.[2]
It is much easier to form a partnership business as compared to a company. These partnership businesses are governed by less strict laws and the partners are free to decide how to run the business. Thus these types of organizations are flexible.[3]
In case of partnership prospective employees may be given incentive of becoming a partner and thus attracted to business. Since a partnership has more than one owner, each having different skills and expertise, there happens to come together a huge pool of acquaintance. Partnership businesses are also much more effective cost wise.[4]
Thus in view of the above discussion we can say that a modern global economy can be run on the back of partnership business.

References:
Freedman, Judith, ‘The limited liability partnership: pick and mix or mix-up?’ [2002] Journal of Business Law.
Mulhurn, Chris, and Howard R. Vane, Economics for Business, 2012.
TheCompanyWarehouse Blog, ‘Advantages and Disadvantages of Partnership – TheCompanyWarehouse Blog – Company Formation and Business Startup Advice’, 2010.,2015
[1] . Judith Freedman, ‘The Limited Liability Partnership-pick and mix or mix up’ [2002] Journal of Business Law
[2] Chris Mulhearn and Howard R. Vane, Economics for Business, 2012
[3] TheCompanyWarehouse Blog, ‘Advantages and Disadvantages of Partnership – TheCompanyWarehouse Blog – Company Formation and Business Startup Advice’, 2010
[4] How-to-start-a-business-guide.com, ‘Partnership Advantages and Disadvantages’, 2015

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