General limited liability for companies

In 1855 the British Parliament passed a Limited Liability Act, and in 1856 a Joint Stock Companies Act that replaced it. Together they let any group of seven or more people form a company by registering with the government and to limit each shareholder's responsibility for the company's debts to the money he had invested in shares, and the name had to end in 'Limited'. Before this, a company needed a royal charter or a special Act of Parliament, and investors in ordinary partnerships were personally liable for all the debts, down to their last possession.¹²

The idea of shares and companies went back to the Dutch East India Company (1602) and to the stock exchanges that traded shares, such as London's. A British Bubble Act of 1720 had restricted joint-stock companies after the South Sea Bubble, and was repealed in 1825. A Joint Stock Companies Act of 1844 had allowed incorporation by registration, but without limited liability. Railway building in the 1840s showed how much capital the economy needed, and reformers such as Robert Lowe, who headed the Board of Trade, and the economist John Stuart Mill argued that limited liability would let small investors back projects without risking their entire fortunes. Critics feared it would encourage reckless speculation and fraud.¹

A consolidated Companies Act in 1862 completed the system, and the House of Lords confirmed the principle of the company as a separate legal person in Salomon v Salomon in 1897. Other countries followed, such as France in 1863 and Germany in 1870. Limited liability made it possible to gather large amounts of capital from thousands of shareholders, which funded railways, steel mills, banks and later multinational firms. It also lets entrepreneurs fail without ruin, which encourages risk-taking, while shifting some of the cost of failure onto creditors and, in extreme cases, society.¹