THE MODERN LAW REVIEW Volume 63 No 3 May 2000 Limited Liability: Large Company Theory and Small Firms Judith Freedman* Current enthusiasm for the `enterprise culture’ results in strong support for easy access to limited liability forms of business organisation. This has manifested itself in the creation of new limited liability vehicles such as the LLC and the LLP. The UK Company Law Review is examining ways of enhancing the attractiveness of the limited liability company to small business owners. This article examines the claims made for the `efficiency’ of limited liability and the applicability of these claims to small firms. It raises the importance of taking into account public policy issues beyond economic efficiency when considering the degree of risk taking and shifting to be encouraged. The article concludes that, although it is difficult to find rational methods of restricting access to limited liability, it does not follow that limited liability should be positively encouraged for all small firms. It is important to signal the limitations of limited liability. Introduction New limited liability forms of business organisation are in vogue. Limited liability is widely regarded as a mechanism that encourages entrepreneurship and makes a major contribution to the law of business organisations. 1 Popular and political sentiment proclaim: ‘the more limited liability the better’. 2 In the USA, the Limited Liability Partnership (LLP) and the Limited Liability Company (LLC) have emerged over recent years as frequently used and strongly supported new legal forms of organisation. The UK is following suit, with its own LLP, originally intended for the regulated professions only, but now to be available to all types of user. 3 The Company Law Review Steering Group in the UK is working on the ß The Modern Law Review Limited 2000 (MLR 63:3, May). Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA. 317 *Law Department, London School of Economics. I am grateful to R. Baldwin, P. L. Davies, V. Finch, C. Norberg, J. K. McNulty and the two anonymous referees for their helpful comments. 1 For some examples of this contention see J. Freedman and M. Godwin, ‘Incorporating the Micro Business’ in A. Hughes and D.J. Storey (eds), Finance and the Small Firm (London: Routledge, 1994) (hereafter Freedman and Godwin (1994)); A. Hicks, ‘Corporate Form: Questioning the Unsung Hero’ [1997] JBL 306. 2 For recent pronouncements and comments to this effect, see ns 17, 38, 132 and text to n 66 below. 3 The Limited Liability Partnerships (LLP) Bill was introduced into the House of Lords in November 1999. See also Department of Trade and Industry (DTI), Limited Liability Partnerships Draft Regulations: A Consultation Document URN 99/1025 (London: DTI, 1999); Trade and Industry Committee, Fourth Report Draft Limited Liability Partnership Bill HC 59 (1999) para 38; J. Freedman and V. Finch, ‘Limited Liability Partnerships: Have Accountants Sewn up the ‘‘Deep Pockets’’ Debate?’ 422 [1997] JBL 387; A. Griffiths, ‘Professional Firms and Limited Liability: An