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Another of those ideas

Companies must have a capital commensurate to their level of trading and those not doing so should be able to call on their shareholders to make good the deficiency in the event of an insolvency. Shareholding cannot be seen to be a risk free activity when it clearly is not.

So, kill off limited liability. Which means that you kill off widespread shareholding. Because you’re only going to have a portfolio if liability is limited.

40 thoughts on “Another of those ideas”

  1. Dennis, Noting The Bright Light Emanating From Ely

    Shareholding cannot be seen to be a risk free activity when it clearly is not.

    So, in Ritchie’s world/head Today’s Average Investor sees owning shares as a risk free activity. Got it.

  2. Theophrastus(2066)

    Kill off limited liability and enterprise is reduced to a largely cash/barter economy (with a massive fall in living standards)…at which point socialism succeeds with equality of misery – with Comrade Spud in charge…

  3. ” kill off limited liability”

    I quite agree. Or at least make it far harder and more costly to obtain it. It shouldn’t be possible for shysters to get LL for a pound down and no skin in the game. LL should cost a LOT more – I reckon £100k down in capital, held in trust in case you go bust so its available to pay suppliers.

  4. How could an accountant ever refer to share ownership as being risk free. Even with limited liability every penny you venture is technically at risk of total loss.

  5. There’s something to be said for making pre-pack deals more difficult but scrapping Limited Liability would be nonsense.

    Farmers, of course, have a great deal of capital tied up in their business so Jim’s argument works naturally for his industry since there will be decent pickings when the farm business fails.

    However, for the wider economy nobody forces anyone to take on exposure to Ltds or PLCs so if they accept the risk of granting trade credit or lending unsecured or what have you then that’s their look-out.

  6. What does “capital commensurate to their level of trading” mean? If I’m a greengrocer selling £100 of fruit’n’veg per day is that £500? I’f I’m letting out a flat at £500 a month is the £150,000 property enough capital? Or do I need £150,000 in a blank account *as* *well* *as* the £150,000 property?

  7. @Jim “It shouldn’t be possible for shysters to get LL for a pound down and no skin in the game.”

    OK Jim. I’ve set up my company for a £1. What’s part 2 of my risk-free approach to making a fortune because I’d love to know it?

  8. “jgh

    What does “capital commensurate to their level of trading” mean?”

    In Spud’s case it seems to mean £1. That’s his exposure in the LLPs and companies he’s involved with.

  9. “Limited liability is now the preserve of the free-loaders
    Posted on August 21 2023

    ……….

    The idea is limited liability, in the form of the limited liability company.

    The suggestion is that this idea is being widely abused.

    The action required is to prevent that abuse.”

    Let’s also consider the abuse of sham LLP ownership structures (also benefiting from limited liability) operated by grifters which allow said grifters to gouge funds from gullible charities

  10. “Let’s also consider the abuse of sham LLP ownership structures (also benefiting from limited liability) operated by grifters which allow said grifters to gouge funds from gullible charities.”

    My father was a lawyer in a partnership with unlimited liability for decades. I remember him being absolutely baffled by the concept of “limited liability partnership”. If you’re a partner then you’re fully liable (“That’s what partnership is!”), otherwise you’re just a shareholder. Wikipedia:

    In an LLP, each partner is not responsible or liable for another partner’s misconduct or negligence.

    Yeah, Dad was right. That’s not a f**kin’ partnership. I know they have a bad reputation, but the whole point of legal and accountancy firms being partnerships was that each partner had a vested interest in the integrity of the others: let a crook into the firm and you could end up paying the price.

    What an absolutely bloody stupid idea.

    In the United Kingdom LLPs are governed by the Limited Liability Partnerships Act 2000.

    One of That Nice Mr. Blair’s, then. Figures.

  11. “wever, for the wider economy nobody forces anyone to take on exposure to Ltds or PLCs so if they accept the risk of granting trade credit or lending unsecured or what have you then that’s their look-out.”

    Bollocks. You try trading as a sole trader and not having to deal with limited companies, or indeed getting any company to pay you at all let alone up front. Its disgusting how many companies go bust owing hundreds of thousands, and the same people just start trading under another name five minutes later. I’m a sole trader. I have skin in the game. My assets are on the line if I f*ck up. The same should be true of people who are in effect sole traders but hide behind the LL shield. If there are less than 10 shareholders, or any one shareholder owns over 50% of the shares then the shareholders should be liable for losses if the company goes bust.

  12. @ Jim
    Totally sympathise.
    But I have to say, after 30-ish years of self-employment after I was made redundant, that the only bad debts from the private sector were companies that genuinely went bust – not ones that restarted without their debts. The public sector, on the other hand …

  13. Shareholding is not a risk-free activity: you are at risk of losing your entire investment (and, in the case of partly-paid shares you can be required to pay over the amount to make the shares fully “paid-up”)
    Who do you think you are fooling Mr Murphy?

  14. For decades my father ran the family business as an unlimited liability partnership. He said credit would cost more if he converted it into a limited company. My mother said “no matter, please do it”. She thought that a business that had been around since the middle of the Napoleonic wars would not be seen as a fly-by-night operation.

    Mum won in the end.

  15. “OK Jim. I’ve set up my company for a £1. What’s part 2 of my risk-free approach to making a fortune because I’d love to know it?”

    Its not about a risk free way of making a fortune, its about secreting the profits you do make away from anyone being able to ask for them back if you f*ck up.

    Take my farm. I could put the land in one company, the machinery in another and make a third the trading arm. All the risk would be located in the trading arm, and thats the bit that third parties would have to trade with. All the supplies, contractors employees etc would be contracted with that that. The trading arm has to pay the land holding arm for the use of the land, and the machinery arm for the use of the machinery, thus extracting more profit away from being able to be got at by creditors. If the trading arm makes a profit I pay it out as dividends, again leaving nothing for creditors. If the trading arm has a bad few years, just let it go bust, leaving all the losses with the creditors. All my assets are untouchable, because they reside in other companies. I’ll be driving around in my new Range Rover, living in the big house, while my old suppliers and contractors take the losses, and possibly go bust themselves.

    Its immoral in my view and shouldn’t be allowed.

  16. Bloke in North Dorset

    I thought rules and regulations had been put in place to prevent, or at least reduce the impact of, the scenario Jim outlines. If they haven’t then I think he has a damned good point and I’m intrigued to hear arguments against regulations, other than it’s difficult.

  17. @Jim
    Those old contractors and suppliers might be reluctant to trade with you a second time. You can change the name of the farm and even it’s correspondence address but unlike cowboy builders it’s location is tied to the land.

  18. @Andrew C

    1) Set up Limited Liability Company for £1.

    2) Collect underpants.

    3) ???

    4) Risk-free profit!

  19. @Jim
    Have you ever heard the phrase “Pierce the corporate veil”? Courts can and do ignore LLCs and other versions of incorporation to prevent schemes like the one you outlined. (This is true for the USA, I don’t know about the UK.)

  20. It is a criminal offence to run a company to the detriment of its creditors.
    So it’s not a case of “we need more regulations” but that someone needs to enforce the regulations that already exist.

  21. O/T the Leb Dims are going to debate period poverty for trans men at their forthcoming conference.
    Never let it be said they don’t have their finger on the pulse of the most salient concerns of the electorate. The event will no doubt be live streamed, link on the party website.

  22. It is a criminal offence to run a company to the detriment of its creditors.
    I don’t think anyone’s talking about that, john. It’s where the risk goes. And as Jim says, isolating the risk in a limited liability company whilst wealth derived from the risk is protected elsewhere. Which does seem to be Spud’s personal intention.

  23. There are crooks everywhere. An example follows.

    We ordered £1500 of stuff from a company trading as ‘Screen with Envy’ in an offer. Months passed, offers kept coming. Nothing was delivered and calls were not answered or emails returned. Company went bust leaving creditors out of pocket to an 7 figure sum. It is hard to think they were not continuing taking orders with little ability to fill them, and little prospect of being a going concern.

    The stock and trading name, and apparently the customer data were bought by the former directors for tens of thousands. Immediately I started getting offers from ‘Screen with Envy’ but this time ‘newCo trading as Screen with Envy’.

    I wrote to the insolvency practitioner and the insolvency service with the details. I put in a subject access request to NewCo for my data but haven’t had a response so will be writing to Info Commissioner as well.

    We didn’t suffer as loss as we used a credit card, many many others were not so lucky, neither was our credit card company.

  24. Part of receiving a limitation on liability is a showing that you have adequately capitalized the company to handle its own reasonably-expected liabilities.

    If you set up some shell that is facially liable but unable to pay, then your own assets become at risk. As stated above, “piercing the corporate veil” is a common occurrence when too-lightly-capped corps do lots of damage and try to say “so sorry, no money!”

    The entire investment system is predicated upon limitations on liability – but you can’t simply scam on that limitation.

    Our legal systems have become complex, but they do retain the basic nugget of, what is fair?

  25. @ bis
    Actually, lots of people are talking about running a company to the detriment of creditors by taking more money out than its real profits and walking away from the debts (some of which correspond to money that’s been pocketed) or declaring a company bankrupt and buying assets for less than they are worth from the liquidator.

  26. “Part of receiving a limitation on liability is a showing that you have adequately capitalized the company to handle its own reasonably-expected liabilities.”

    Not in the UK it isn’t. You can start a limited company with no capital paid up at all. All it costs is a few quid in registration fees. Its a scammers dream.

  27. XT

    “Piercing the corporate veil”

    A USian thing. In England & Wales (not sure what the Scottish situation is) it is a vanishingly small possibility, requiring exceptional circumstances.

    As Jim points out, it is a nightmare in certain sectors. Construction being a prime example.

  28. Have we all become much richer (in a rising tide kind of way) since the introduction of limited liability? Is this one of those problem areas, like leaving the gold standard, fractional reserve banking and patents / copyright, where there are many interesting arguments against but none of us would want to live in a world where they hadn’t happened?

  29. Given that we have already experienced widespread shareholding, it’s far from certain that lack of limited liability would be as big a change as you think. Consider how there are Islamic banking facilities even though Islam forbids charging interest. All that is needed is the right way around any new regulations and a substitute can be found (e.g. maybe instead of shares, people own loans to the company with special conditions – rather like bonds, but with the conditions including terms such as profit sharing).

    @Theophrastus(2066) – “Kill off limited liability and enterprise is reduced to a largely cash/barter economy”

    Certainly not. Lack of limited liability would mean a return to business owners going bankrupt. It would not mean their creditors would get paid much more, as owners of small businesses often have given personal guarantees and invested a significant fraction of their net worth in the business.

    @AndyF – “How could an accountant ever refer to share ownership as being risk free”

    If you have followed his ideas for a while, you’ll get the impression that he considers that capital is no longer yours once it is invested (or, at least, that you shouldn’t be able to sell your shares to anyone else). So on that basis, you have nothing more to lose.

    @jgh – “What does “capital commensurate to their level of trading” mean?”

    He is clearly familiar with the way in which limited liability works for companies, and is trying to express one of its rules. In theory, a company should never be unable to pay its debts as it starts with an amount of share capital and uses that to finance its operations (so, for example, not buying goods on credit unless there is unused share capital to cover it). In reality, this is hardly enforced. But that is grounds for better enforcement rather than abolishing the whole class of companies.

    @Jim – “The same should be true of people who are in effect sole traders but hide behind the LL shield.”

    How about using the definition of a “close company”? – https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm60060

    – “If the trading arm makes a profit I pay it out as dividends, again leaving nothing for creditors. If the trading arm has a bad few years, just let it go bust, leaving all the losses with the creditors.”

    Deliberately doing that sounds like Fraudulent Trading from section 213 of the Insolvency Act 1986, https://www.legislation.gov.uk/ukpga/1986/45/section/213:

    (1)If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.

    (2)The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper.

    And if it escapes that, it might still fall foul of s.214 Wrongful trading. However, in the vast majority of cases, the traders are incompetent rather than malicious and do not have assets worth much, so a liquidator will not waste money pursuing them with little prospect of recovering much more than the cost of pursuing them.

  30. “(1)If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.”

    You don’t have to be deliberately fraudulent. The LL shield just encourages risky behaviour. Heads the shareholder wins, tails the creditors lose. If the shareholders knew their assets were on the line they might make different decisions.

  31. You don’t have to be deliberately fraudulent. The LL shield just encourages risky behaviour.

    Yes of course it does. That is one reason why the West has been successful — we take risks.

    You think all those internet and technology start-ups were a bad idea? Because almost every start-up is a very risky business. But without those risks, our economies would be moribund.

    The banks lending the money protect themselves to some extent with personal guarantees, but even they lose out quite often. Trading is an inherently risky business.

  32. “The banks lending the money protect themselves to some extent with personal guarantees, but even they lose out quite often. Trading is an inherently risky business.”

    The banks are big and ugly enough to look after themselves. As are other large companies. I’m talking about individual small traders ending up being bankrupted by companies who they have worked for going bust and owning them thousands, while the owners of said failed company swan around with huge amounts of assets which no-one can touch. Its immoral and should not be allowed.

    Its things like this that give capitalism a bad name. The small man being crushed by big business and sharp practise and the law of the land enabling such behaviour. Free markets do not require LL. Its a legal fiction, it doesn’t exist in reality. In the absence of it if you are in business and cause someone a loss then they can come after your assets. That seems fair to me. Allowing people to hide their assets and still cause people losses and walk away from them is designed to give free markets a bad name as just a way for the wealthy and powerful to rook the poor and weak.

  33. Jim,

    Re “LL being a legal fiction”, perhaps consider: a small consultancy business that does something relatively benign, but for which there is the remote possibility that it might be sued for a very large sum. The business has insurance of course – but for which there might be gaps in reality (anything that the PII company can do to avoid paying out..). Business owner has a personal life, with wife & kids, and assets (and liabilities) to protect their future. The consultancy is entirely separate from his family. LL allows the consultancy to not to put his family in danger.

    No different to the position if the consultant/consultancy was an employee relationship rather than a business/self employed. We don’t generally demand that employees (and their families) be faced with such business risks (other than losing said job/income stream etc?).

    Yes, the consultant could move family house and other assets into his wife’s name, but then that’s no different morally to LL in the first place?

  34. @PF: As I said in my first post the obvious solution is to make LL expensive. Or at least considerably more expensive that it is today when they are effectively giving it away like confetti. If your consultancy had to put up a bond of £100k (or £50k whatever) to get LL then everyone would be happy. The consultant knows the worst he does is lose his bond money, and can avoid a multimillion pound lawsuit taking everything he has. But would get it back when he eventually closes down (or sells) the company without ever having a problem. Shysters who just want to set up multiple companies to shield assets would have to find a lot of capital and would be put off. The out and out fraudsters who register hundreds of companies to single addresses would be out of business.

    Whats not to like?

  35. “If your consultancy had to put up a bond of £100k (or £50k whatever) to get LL then everyone would be happy.

    Not the newly impoverished consultant trying to take their first steps! That’s more than one might need for a house deposit. 🙂 Excessive regulatory burden is rarely conducive to encouraging new small businesses to start up. Far easier to remain being an employee (of megacorp, and they have enough advantages already)…

    Seems to me that your main beef is with the criminal shysters/fraudsters. I’m with you. And hence as others have mentioned above, that’s where I would target any effort.

  36. “Seems to me that your main beef is with the criminal shysters/fraudsters. I’m with you. And hence as others have mentioned above, that’s where I would target any effort.”

    And how likely is that to happen? Proving fraud in such cases is incredibly difficult. And sharp practice isn’t illegal, and would be virtually impossible to make so either.

    Its obvious that free and easy access to LL is a fraudsters dream. And the State has zero interest in doing anything about them either. Heck if it even cost £10k to start a LL company that would be a start. You wouldn’t get all those thousands of companies registered to a house in Cardiff. I doubt any of them are going to be the next Apple.

    https://www.walesonline.co.uk/news/wales-news/hmrc-boss-faces-questions-curious-26940553

    And anyway my beef is also that people are able to hide assets that should be available to settle their debts by using LL companies. Its immoral that someone can rack up hundreds of thousands of debt and just walk away from it despite owning enough assets elsewhere to cover them. Its just wrong.

  37. How about if non LL creditors had priority over LL ones in a bankruptcy? If an person/business entity goes bust the receiver must pay all sole traders and partnerships before any limited companies?

    That seems fair to me – if you trade with LL why should you have the same rights as those who trade with UL? And sole traders and partnerships are by definition private individuals who are the one who get shafted the most in a bankruptcy. If their losses tip them into bankruptcy too then all their assets are on the line, whereas the shareholders of a company creditor who is forced into bankruptcy by its losses are protected by the LL.

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