Commercial Applications
Why is the principle of limited liability important for shareholders in a joint stock company?
- It allows shareholders to transfer shares freely.
- It restricts the financial loss of shareholders to the unpaid value of shares.
- It ensures shareholders participate in daily management.
- It makes shareholders responsible for company debts.
Answer
It restricts the financial loss of shareholders to the unpaid value of shares.
Reason — The principle of limited liability is important because it restricts the financial loss of shareholders to the nominal/unpaid value of shares held by them. Even if the assets of the company are insufficient to satisfy the claims of the creditors, no member can be called to pay anything more than what is due from him. The personal property of shareholders cannot be attached to meet the company's debts. This encourages people to invest money in a company without fear of unlimited loss.
Related Questions
Types of companies are :
- Registered Companies
- Chartered Companies
- Statutory Companies
- All of these
The number of members in a private company are :
- Minimum = 5, Maximum = 100
- Minimum = 2, Maximum = 200
- Minimum = 7, Maximum = No limit
- None of these
A company faces criticism for taking too long to make decisions due to bureaucratic delays. Which disadvantage of joint stock companies is highlighted here?
- Lack of motivation
- Delay in decision-making
- Conflict of interests
- Unhealthy speculation
A shareholder in a public company transfers all their shares to a competitor, leading to significant changes in company control. The board of directors raises concerns about the implications. What feature of public companies allows such an event to occur?
- Transferability of shares
- Perpetual succession
- Limited liability
- Common seal