On The Expansion Of Limited Liability

The article has primarily researched the extension of the limited liability from joint-stock limited corporations to small and middle enterprises, which includes its appearance, its theoretical shifts, its justification, and the protection to creditors after the extension. The last part of the article has specifically analyzed the problem existing in the construction of our limited liability which will be applied to small and middle enterprises, and then has gave relevant suggestions to improve it.The first chapter defines the legal meanings of the extension of the limited liability. The extension of the limited liability means that the limited liability has extended from joint-stock limited corporations to small and middle enterprises. There are two stages of the extension of the limited liability: the first is to extend to small and middle corporations, which is still restricted in the scope of corporations and legal entities, such as limited companies and one man's companies; and the second is to extend to enterprises which cannot be classified as corporations, primarily, to partnership enterprises. The article will focus on the second stage.The second chapter analyzes the historical course of the establishment of the limited liability from the attempt of establishing the limited liability before Commenda to the initiation of the limited liability in the period of Commenda, and finally to the common establishment of the limited liability in the era of joint-stock limited corporations. This is a period of beginning and developing of traditional limited liability system.The third chapter introduces the extension of the limited liability. After the establishment of the limited liability, hundred years had passed before it has extended to the small and middle corporations. At first, it extended to general limited companies, and then to one man's companies. The extension of the limited liability to limited companies can be considered an initiation of deviation from the traditional principle of power division, from which we may find the great shift of the limited liability, which is, from attracting investment and agglomerating capital to directly protecting investors. And the logic of the limited liability has obviously changed from its applying to one man's companies, because the limited liability of this kind of company has no function of agglomerating capital, and its function is only to protect investors. The second stage of the extension of the limited liability is concerning the enterprises which cannot be classified as corporations, and primarily, the limited liability has extended to partnership enterprises. Specifically, it includes the extension to Limited Partnership, to Limited Liability Partnership and Limited Liability Limited Partnership, and to Limited Liability Company. The extension of the limited liability in this stage has a great breakthrough, that is, the applying requirements of the limited liability have not included the qualification of legal entity.The fourth chapter describes the theoretical changes covered behind the extension of the limited liability. Any system may be considered as the product of history, which will change with the development of society. And at the course of the extension of the limited liability, its theories have been changed too. firstly, the function of the limited liability has changed from agglomerating capital to directly protecting investors; secondly, the applying conditions are more loose than they have been, and the power division and the qualification of legal entity are not essential conditions any more; thirdly, the value orientation of the limited liability has changed subtlety from the preference of efficiency to the balance of efficiency and equality, which can be proved by the regime of denying the limited liability and the limited partnership.With the evolution of the limited liability, we have to ponder a question, that is, where will the limited liability go? The answer of the article can be divided into two aspects. The first is that the extension of the limited liability to small and middle enterprises is an inevitable tendency. Naturally, the establishment of the limited liability is needed by the development of productive forces. And about the legislation of the limited liability, we may treat it as a system selection after benefit consideration by legislators. We need not to escape a fact that the limited liability has deviated from traditional civil liability system. The development of the limited liability is a course which displays a gradually limitation to liabilities, that is, to confine uncertain liabilities to a predictable scope. We can find the user-friendly concern and the idea of humanist from the course. With the development of the gradually limitation to liabilities, the function of the limited liability has shifted from agglomerating capital to directly protecting investors. The former is of utility and superficiality, and the latter is of humanist and long-term which may help to prompt the investment. With the change of theories of the limited liability, the definition of contractual explanation of it, and the limitation of negative aspects of the limited liability, we may conclude that the extension of the limited liability to small and middle enterprises is inevitable.The second, the relativity tendency of the limited liability is more obvious than before. With the balance of efficiency and equality, the relativity tendency of the limited liability is more obvious than before. And the limited liability of relativity can regular the relationship between creditors and debts precisely.The third is that the multiplication and the contractual arrangement may be the destiny of the form of liability. Naturally, the limited liability can be explained as a contract of creditors and obligators. To protect the investors by contractual limited liability was the earliest form of the limited liability. However, when the need of the limited liability was more and more common, the individual agreements had become inefficient. So, statutory limited liability became a better alternative. Nowadays, the applying scope of the limited liability is more and more extensive, and the unlimited liability only applies to investors of sole-investor enterprises and partners of common partnership enterprises. But the dramatic extension of the limited liability will also lead to some problems. And under the background of the large extension, some investors will voluntarily choose the unlimited liability to prove their credit. Thus, the article predicts that the "stipulating" form of liability based on new logic point will be the main form in the future. And the destiny of the form of liability is to determine the form of liability by contracts. The contractual arrangement of the form of liability will necessarily be accompanied with the multiplication of the form of liability. And the multiplication of the form of liability helps to establish a diverse system of the form of enterprises which will provide investors and creditors with more chooses and satisfy the diverse preferences of investment.The fifth chapter discusses the justification of the extension of the limited liability. Because the extension of the limited liability to small and middle enterprises is beyond the traditional logic established in the era of joint-stock limited corporations, we must find other justifications to explain the reason why we should apply the limited liability to small and middle enterprises. Firstly, the development process of civil liabilities is a process within which liabilities have continually been restrained. Under the background of the development of legal liabilities, the change of the limited liability is in the development process of civil liabilities, which displays the evolution of credit ethics. Secondly, the limitation of big corporations and the advantages of small and middle enterprises in the information age can be considered as another justification of the extension of the limited liability. To some extent, the social need for small and middle enterprises and the need of small and middle enterprises for the limited liability are the most persuasive reasons to extend the applying scope of the limited liability. Thirdly, as far as the theoretical support of the extension is concerned, we can prove that the extension of the limited liability to small and middle enterprises is efficient by using legal economic theory; we should treat the form of liabilities as a contractual issue from the perspective of liberalism; and we must give all investors same treatment from the perspective of democracy and equality. Finally, from the social advantages and disadvantages of the extension, the most important thing is that as a regime which prefers efficiency to equality, the limited liability regime needs to balance all possible advantages and disadvantages it may bring to our society. There are many facts that can prove the extension of the limited liability to small and middle enterprises may greatly prompt the investment, improve the economic development, and benefit the whole society. This is just the fundamental reason of the dramatically extension of the limited liability.The sixth chapter discusses the extension of the limited liability and the protection of creditors. The article wants to analyze how to protect the interests of the creditors under the background of the extension of the limited liability.The limited liability concerns two fundamental parties, investors and creditors. We must solve the question of protecting creditors well for extending the limited liability smoothly. To do it, we must appropriately limit the limited liability. Necessary limitation is needed to extend reasonably.It is true that after the extension of the limited liability to small and middle enterprises, the negative externality which the creditors may undertake is bigger than before, because of the small capital, the difficult of power division and the closeness of the small and middle enterprises. However, whether the negative externality will become reality or what extent it will be reality and how to protect needs to be analyzed respectively according to the fact that the creditors are voluntary or non-voluntary.Firstly, protect the interests of the voluntary creditors under the extension of the limited liability. Based on the contractual theory of the limited liability, generally, the extension of the limited liability to small and middle enterprises doesn't increase extra risks to the voluntary creditors, For the voluntary creditors, the limited liability is a contractual issue which determined by the investors and the creditors of enterprises. The voluntary creditors can actively weigh the risks involved, and find alternative means to cover the defects of credit of the enterprises by negotiation, or they can refuse to cooperate with these enterprises. But the extension of the limited liability will increase the probability of abusing the limited liability. Generally speaking, small and middle enterprises are close enterprises, which means within these enterprises, the ownership and the right of management may not be divided as be needed. The fact is convenient for these enterprises to abuse the limited liability. And then, the article gives some suggestion of protection to the voluntary creditors as below: firstly, on the condition of the abusing of limited liability, protection by contract law and guarantee law; secondly, on the condition of the non-abusing of limited liability, protection mostly by denying limited liabilities. The denying of limited liabilities of small and middle enterprises to non-voluntary creditors has many characteristics.Secondly, protect the interests of the non-voluntary creditors under the extension of the limited liability. The creditors of enterprises are mainly voluntary creditors, but we should pay more attention to the non-voluntary creditors because they are easily infringed.The methods of protecting the non-voluntary creditors are primarily to use tort law and limit the use ness of limited liability. We can determine whether the enterprises should undertake liabilities or what liabilities they should undertake according to tort law, and then, the form of liabilities can be used to determine how much money the enterprises and investors can use to undertake their liabilities.Firstly, the key of the protection by tort law is to establish the doctrine of liability fixation which will benefit to creditors and to extend the scope of rights should be protected. About the doctrine of liability fixation, our system of focusing on subjective negligence cannot efficiently satisfy the needs of victims. It is unfair and far away from social justice. Comparatively, the criterion of objective negligence adopted by the main west countries is more reasonable, and can be operated easily. And as far as the scope of the right which should be protected by tort law is concerned, we can find an extensive tendency in the world. But our tort law still stays at a traditional stage, and the scope of the protection is narrow, which need to be improved.Secondly, we can limit the use ness of the limited liability to protect non-voluntary creditors. Generally, the non-voluntary creditors are those who were damaged by torts of the enterprises. So, they cannot prevent the externality of the limited liability of the enterprises. It will be unfair if the damages of the non-voluntary creditors which induced by the risk they cannot control or predict cannot be compensated enough. At some extent, that will deviate from the basic value of law. The application of the limited liability to non-voluntary creditors is very unfair even if the investors or the enterprises didn't abuse the limited liability. Thus, the article believes that for non-voluntary creditors, if their damages cannot be compensated enough by all other legal mechanisms, the limited liability of the investors should be denied in certain cases in order to use the personal property of the investors to compensate the non-voluntary creditors. Because of the pattern of management of the partnership enterprises and their special type of credit, the application of the regime of denying the limited liability should be more restrictive.Finally, the seventh chapter includes a legislation research of the limited liability of small and middle enterprises in our country. Although we have established a systematic the limited liability regime, already have extend limited liability to small and middle enterprises. But our ideas of the limited liability regime and the protection of creditors are still outdate. There are many defects existing in the legislation of the limited liability, which directly restrains the investments. Firstly, the legislation of the limited liability of limited liability companies is conservative; secondly, the requirements of applying the limited liability to limited partnership includes the strict division of the ownership and the right of management, even stricter than that of limited liability companies, which doesn't comply with the tendency of development of the limited liability. Besides, there are no relevant provisions of preventing the abusing of the limited liability. Thirdly, the institution of the substitution compensation of the limited liability partnership is defective, which needs to be extended and defined. Fourthly, an obvious omission of our Partnership Enterprises Act is that there's no provision concerning the limited partnership with limited liability, which is unfair for the common partners in limited partnership. Finally, we haven't concerned the characteristics of denying the limited liability of small and middle enterprises.Nowadays, the fundamental function of the limited liability has shifted to the protection of investors, and the applying conditions of limited liability are more and more simply. However, the application of the limited liability will be more scientific and precise than before, and the balance of efficiency and equality will refuse the application of the limited liability to fraudulent investors. We should improve our limited liability regime of small and middle enterprises under these ideas. Specifically, we should endeavor in following aspects:A. To improve the limited liability of limited liability companies(1) Reforming the management model of limited liability companies, and removing the system restraint of the limited liability. We should bravely give up the system restraint which applies to joint-stock limited corporations, and emphasize the free management of small and middle companies. The articles of incorporation should be treated as main basis of company autonomous, and the relevant legislation should adopt the introductive model to provide references to enterprises in need. It should be maintained that the management model doesn't has to do with the form of liability of investors.(2) Relaxing the conditions of applying the limited liability to one man's companies. Because the first function of the limited liability is to limit the liability of investors and protect them, it is unnecessary to apply these strict conditions to one man's companies. So, we should relax the conditions of applying the limited liability to one man's companies, such as, to reduce the minimal capital required by law.B. The suggestions of improving the limited liability regime of limited partnership:(1) To cancel the restraint to the right of management of partners in limited partnership, at least extend the right of participation and supervision of the partners.(2) To establish the system of denying the limited liability of limited partnership. Where the limited liability exists, the abusing of the limited liability must exist. So, the system of denying the limited liability is necessary to prevent the abusing conducts.C. The suggestion of improving the limited liability regime of limited liability partnership:(1) To improve the institution of substitution compensation resources. We may make the vocational insurance in special partnership to be mandatory insurance; to improve the system of business venture fund; to widen other substitution compensation resources and make up for the shortcoming of vocational insurance.(2) To extend and determine the applying scope of the limited liability. The applying scope of the limited liability of partnership with limited liability in china is too narrow, which should be broadened.(3) To provide the liability of partners who hold directly supervisory and controlling power. Where actor is wrongful for damages of victims, the partners who hold directly supervisory and controlling power to the actor cannot claim the limited liability.D. We should introduce the limited partnership with limited liability.Only if the limited partnership and the partnership with limited liability have established, we must face the question whether we should admit the limited partnership with limited liability. The combination of the above two will form the limited partnership with limited liability which may spontaneously produce in practice, even there's no provision. So, we should introduce it to escape those unnecessary disputes.E. To improve the regime of denying the limited liability of small and middle enterprises.The denying of the limited liability of small and middle enterprises is special, and we should improve it according to these special points, such as, adopting the principle of "substantial abusing", the principle of post-regulation, preventing the abusing of the denying of the limited liability, constructing the regime of denying the limited liability which can embody the characters of partnership enterprises.The creation of the article:1. About the definition of the extension of the limited liability and the stage division of it, the article expressly points that the extension of the limited liability is to extend the limited liability to enterprises which cannot be classified as corporations, that is, small and middle enterprises. The extension of the limited liability has started from the era of limited companies, and the extension can be divided into two stages according to the extent of extension: the extension to small and middle companies and the extension to partnership enterprises.2. The article analyzes the theoretical changes of the institution of the limited liability covered in the extension of the limited liability, and observes that with the extension of the limited liability, the function, apply conditions and value orientation of the limited liability have changed largely.3. Based on the reconsideration of the traditional limited liability regime, the article distinguishes the inherent connotation of the limited liability and the special regime of joint-stock limited companies, and concludes that some systematic connotations of the traditional limited liability came from the characters of joint-stock limited companies, not the inherent connotations of the limited liability itself, which should be removed from the regime of the limited liability.4. The article observes that the limited liability, the qualification of legal entity, and the division of power have different systematic functions respectively, and embodies different preference of investment. They cannot determine each other, because they are parallel, and they may be combined by investors according to their preferences.5. As to the protection of creditors after the extension of the limited liability, the article finds that the application of the limited liability should be limited for the non-voluntary creditors because the tortuous liability cannot be considered as a kind of commercial liability. This is a limitation to the application of the limited liability. And for the voluntary creditors, the limited liability can be explained as a contractual issue. If there's no fraudulent abusing of the limited liability, the interests of voluntary creditors will not be infringed. Moreover, voluntary creditors and debts are all businessmen, whose status may often change with each other. So, their interests are balanced from a whole perspective.6. The article suggests using "the denying of the limited liability" to replace "the denying of juristic personality". Essentially, the denying of juristic personality is to deny the limited liability. And the denying of juristic personality doesn't include the denying of the limited liability of partnership enterprises. Thus, it is not a precise main concept, but a sub-concept of the denying of the limited liability.