Why the limited liability company is a grand and wondrous human invention
The third great invention of all time was the limited liability company. This is why it’s so gratifying to see the expansion of who can have one and how, in Bangladesh. This newspaper has reported that it is now possible to have a one-man company, and also that the process of creating one is to be simpler.
That expansion might seem a little small, possibly a little too detailed, but as the piece goes on to explain, this will aid the country in rising in the “ease of doing business rankings.” That being, sadly, is a listing in which Bangladesh ranks hopelessly -- or, as it happens, with a little hope as in this change -- far down near the bottom.
The first great invention was of course agriculture -- it allowed population to rise and also created the ability to stay in one place -- that necessity for civilization. The second was the scientific method, which gives us the process by which to puzzle out both how things work and also how to do things. The limited liability company is that third for it’s the vital necessity to enable large scale economic organization.
Before limited liability all participants in an enterprise, whatever it was and whatever we call it, whether capitalist or socialist, communal or individual, were liable equally both singly and collectively for all of the debts of the adventure. You could, therefore, lose everything by participating, not just the amount that had been set aside for this business.
That, in turn, limited how many people would or could participate for it’s not going to be possible to get thousands of people to sign up to that sort of risk. It also meant that people, even rich ones, could or would only take part in one of a few businesses.
Once it was possible to take part in an enterprise but to risk only the amount pout into it, the limited liability, then two things happened. It was possible to get thousands of people to take part, thereby making it easier to raise large amounts for large projects.
And each participant could take only a small slice, allowing them to take part in many such enterprises -- they gained diversification. It is these two that are the foundation of a rich society, the ability to mobilize the savings of thousands, plus that diversification.
So, making it easier to take those steps, to create a limited liability company, this is good for the future of that society. This is not though just about rising up those rankings about the ease of doing business. Cosmetic changes to achieve just that aren’t quite the point.
The listings come from observation of what aids in making a society richer. It’s thus the substance, not just the shallow surface, that matters. The point is to make it easier to set up a business -- so, to register for taxes, gain an electricity supply, be able to rent premises, hire workers, all those things as well as just registering a company.
For if it’s easier then more businesses will be set up. The other side of the ledger also needs to be looked at. Most business- es that are set up fail. The numbers for my native Britain are that about four out of five don’t exist after five years. Thus it’s also necessary to make it simple and easy to close down a business.
Most of these experiments do fail and we need to be able to clean them up. Move the resources off to some other possible use where they might be better used. This means a simple and, above all, swift bankruptcy process. This will mean that some involved in the process will be unfairly treated.
Creditors of various types will lose out, undoubtedly -- that’s what not having enough money to pay the bills means. But the benefits to society of a vibrant business set up scene are so great that we have to accept some of that unfairness at the other end of the process.
This doesn’t mean that the crooks should be able to hide behind the corporate veil and get away with ripping people off. But it does mean that it must be simple, logical, and easy to close down a business just as it is to open one up. The limited liability company really is one of those grand and wondrous human inventions.
Say- ing it’s only the third really big one is possibly overplaying my hand a bit, but then my background is finance and economics so I would say that. The important thing about business though is that yes, it’s better that they are easier to set up so Bangladesh is moving in the right direction.
But because the likely end state is failure -- it is for the vast majority of all businesses -- it must be easy to kill a business as well as to breathe new life into one. Getting the bankruptcy law right is just as important as making formation easier.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.