Limited Liability for Investors
Nineteenth-century reforms made investment easier while shifting some risks to creditors and the public.
The UK's Limited Liability Act of 1855 allowed shareholders in qualifying companies to limit personal exposure to business debts. The reform followed decades of debate and earlier forms of incorporation; it changed the terms on which capital could be raised.
Limited liability can encourage investment by capping downside risk, supporting projects that might otherwise be too risky to fund. It can also leave creditors, workers, or the public bearing losses when companies fail, especially if managers take excessive risks.
Without the reform, some ventures might have attracted less investment, but business would not have stopped. Partnerships, state funding, insurance, and other corporate forms could have developed, with different distributions of risk.
The rule separates owners from some consequences of enterprise. A fair system must ask who gains from risk-taking and who absorbs the damage when a venture's costs exceed its private resources.
Without the reform, some ventures might have attracted less investment, but business would not have stopped.
When I encourage people to take economic risks, who do I expect to bear the losses if those risks fail?