Colin's Cornucopia

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The Limited Company

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The concept of men banding together in a corporation for mutual aid goes back to at least 1300 but the first modern form of a limited company was formed in Britain to trade overseas. The East India Company was formed in 1600 and was granted a fifteen years monopoly on trade with India. If became very rich.

The essence of limited liability is that it enables men to put their funds and efforts together to obtain a multiplying effect and limits their liability to the amount they invest in the company. This enables men to take risks that they would not be able to take as individuals. The format has been so successful that we have come to regard most companies as highly reliable trading partners but the reality is that any company may well be extending itself far beyond what is sensible for an individual and if you deal with that company you are assuming some of that risk. But the company has been so successful that the risk of dealing with such an organisation is, on average, much less than the risk of dealing with other individuals.

The limited liability formula has been so successful that even very small groups of people can gain advantage from it. Anyone trading with more than one or two employees will gain enormous advantage from incorporating his company. The format has succeeded far beyond the wildest dreams of men. It has created enormous wealth by enabling ever expanding exploitation of the resources of the earth which are the only true wealth we have.

The limited liability company, as originally conceived, was granted immunity from many financial liabilities in exchange for quite rigid control of its operation and accounts. The Objects of a company have to define its purpose and objectives and it cannot operate outside those – although changing them is usually not especially difficult.  The purpose of the objects is to allow investors to know exactly what the terms of the contract are that they are entering into by buying shares in the company. If a company’s objects says that it is to mine tin then it cannot mine coal or drill for oil or repair cars. It must mine for tin. If it discovers lead in its mine then it must change its objects. Objects clauses are usually written to take account of most, but not all, such eventualities.

The company must also have a Memorandum of Association that defines the terms of the coming together of the shareholders. This is to ensure a level playing field so that each investor enters on even handed terms and is treated equally. What this  means in practice is that if a company runs up debts and fails then the liability of each investor is limited to the money they have invested in shares. They cannot be sued for more money.  A private individual who ran up debts would have no such protection. There is thus a far greater ability on the part of the company to assume risk than can the individual. The downside of this is that the creditors of a limited company rarely get paid if that company fails. In effect the suppliers to the company subsidise it for free. 

If you run a small company supplying a big company you will do well to keep abreast of what is happening to that company’s performance in the stock market and if it is to be subject to a takeover or a bankruptcy proceeding. You should also ensure that you get paid regularly and in short order. Credit control is the most important part of your business. Despite these limitations, small companies generally do very well from big companies as the big ones usually have plenty of money and usually are highly dependent upon good suppliers.

Overall the limited liability company has served our civilisation well so far. But now we come to the real downside. Many companies, and there are several thousand, have become so big that their resources exceed those of over half of the nation states on earth. You will remember that the nation state licensed the company and set the terms under which it could operate. Now the companies can dictate the terms under which they operate and if one state will not accommodate them they simply move elsewhere.

This process started in the shipping industry where vessels once belonging to national fleets were registered in tiny states which were very happy to have the modest registration fees and had no interest in restricting or regulating the operation of those who were happy to pay for a flag of convenience. The shipping industry was transformed. The big corporations soon learned the trick and now the nation state, upon which rests the very basis of human rights is at the mercy of whichever corporation chooses to exploit it. And damn human rights. The nation state, the cradle of freedom, has lost its way and its power.

Colin Walker

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