What « limited liability » actually means

Karim puts €5,000 into the capital of his company, which runs up €90,000 of debt before closing. He is told he will lose only his €5,000. That is true, and it is incomplete: two situations would knock that protection away. Before reading on: what does it rest on, and where does it stop?

One sentence, repeated from one form to the next

Article L223-1 of the Commercial Code founds the limited liability company on a simple idea: members « bear losses only to the extent of their contributions ». What they put into the company may be lost; what they kept outside it cannot be claimed from them.

Article L227-1 says exactly the same for the simplified joint-stock company: it « may be set up by one or more persons who bear losses only to the extent of their contribution ». The wording is reproduced word for word, and it is the shared footing of both forms.

The protection therefore rests on a separation: the company is a person distinct from its members, with a patrimony of its own. Its creditors address it, not them. That separation is what the corporate form buys, and it is its principal reason for existing.

Two well-known breaches

The first comes with the office of director. A manager's liability may be engaged beyond the amount of their contributions in the event of mismanagement: they are then pursued as a director, not as a member, and being a member does not shelter them.

The second comes from banking practice. A lender advancing money to a young company will often ask for the director's personal guarantee. That guarantee is a voluntary undertaking, external to the company: it does not contradict the statute, it works around it by contract.

Minimum capital has gone

Neither form requires minimum capital any longer. The limited liability company dispenses with it entirely; the simplified joint-stock company sets its own freely, with one euro as the floor. The barrier to entry is therefore legally nil.

That liberality has a counterpart the statute does not spell out. Capital of one euro tells every creditor that the company owns nothing of its own, and that is precisely what prompts a request for a personal guarantee. Minimum capital has left the text, not the negotiations.

What capital is really for

Capital is not a reserve held back for creditors: it is spent at once by the company, on equipment, stock or opening cash. Its function is to give the business something to start with, not to guarantee anybody.

It plays a second, less visible role: it distributes power. Voting rights and the share of profits are computed on contributions, so an amount decided casually fixes for a long time who decides and who receives.

Very small capital in a company with several members therefore raises a practical problem. The slightest entry by a new member upsets the balance, for want of a base wide enough to absorb their contribution without redistributing everything.

The practical rule that follows is worth stating plainly. Capital should be sized on what the business needs to open its doors and on the balance the founders want between them, not on what the registry will accept — the registry will accept almost anything.

The sole member is not a separate form

Both articles contemplate a company with a single person. That person is then called the « sole member », and exercises the powers the law attributes to the body of members. It is not a distinct corporate form, it is a configuration of an existing one.