Sunday Discussion: Should We Abolish the Limited Liability Corporation?

Sunday, October 23rd, 2011

I’ve been in D.C. the last few days, and I’ve been chatting about this issue with a number of people. I think it might make for an interesting conversation here.

We libertarians are regularly accused of being corporatists, despite a wealth of evidence to the contrary. But what are the arguments in favor of keeping the legal protections that define corporations?

It seems to me that there are a number reasons libertarians might support doing away with them. The most obvious is that corporations aren’t remotely free market, and there’s really no incentive for them to be. If your sole duty is to your shareholders, rent seeking—using your political influence to get the government to pass laws that restrict competition and hurt your competitors—isn’t just a good business strategy, it’s really an obligation. Same with other issues like the use of eminent domain.

Just from observation, it seems to me that the kinds of people who rise up to lead publicly-held corporations tend take a pretty namby-pamby, go-along-to-get-along approach to free markets. You rarely see a corporate executive angrily stand up to politicians or regulators who abuse their power. There’s very little to be gained from it. In my experience, the hardcore free market types in the business world tend to be people who have started their own businesses, and they tend to be partnerships or sole proprietorships. Which makes some sense. When you don’t have shareholders to report to, there’s more room to act on your principles. There also seems to be something inherently wrong with a legal structure that shields people from any personal financial ramifications for the decisions they make. We libertarians understand the problems that stem from shielding government actors from any real repercussion for their actions. Seems like the same would apply to corporations, and explain some of the pretty awful things we find corporations doing from time to time.

But I’ll confess that this is well outside my area of expertise. So I hand the question over to you. Should we do away with corporations? If not, why not? If so, what sort of legal/organizational structure should replace them?

It’s obviously never going to happen. But I think it’s an interesting question.

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88 Responses to “Sunday Discussion: Should We Abolish the Limited Liability Corporation?”

  1. #1 |  Ken | 

    Speaking as someone who actually is (has?) a single-member LLC, which is definitely a small business, there is value in only being liable for what I’ve put in. Suppose for example I’m hit by a software patent troll: the most they can get is the value of the company, not my own personal savings. And it is a real threat.

    Corporations are definitely an artificial creation of the government and we should not pretend otherwise. But having limited liability is just as useful to the “proprietorship” that’s formed as an LLC as it is to a publicly traded investment bank.

  2. #2 |  ricketson | 

    You know, I was just pondering this last night…

    First, the empirical question: What effect does incorporation have on the economy? How does it change the structure of markets (e.g. the size and number of firms)? How does it affect the mode of raising capital? I wouldn’t know if any research has been done on this, but I doubt that there are good “natural experiments”… I can’t think of any country where there are strong property rights, well-developed markets (including capital), but not corporation. At best, there might be some countries that are more or less liberal in granting corporate charters.

    Can anyone provide good background reading on the history of the corporation?

  3. #3 |  Stephen | 

    I would tend to think that other changes would have to be made at the same time. Without an LLC, people are going to be more reluctant to start a business. Fear of frivolous lawsuits making the owners homeless for example.

  4. #4 |  Joshua | 

    The solution to the liability issue is for people to buy insurance to protect themselves.

    I imagine that if we had a system like this, stock brokers would work it out so that the cost of buying insurance would be rolled up into the cost of buying a share of stock. (Since the owner of a publicly traded company would need insurance to protect itself from any misdeeds committed by the company.) This would even result in companies that are prone to lawlessness becoming a worse investment due to the insurance costs.

  5. #5 |  Jeff | 

    In the world of app development for phones/tablets I could not imagine releasing an app into the world as anything other than a corporation, even though I am really a sole-proprietorship. The reason is that I have no other way of protecting my personal assets from the absolutely ridiculous and arbitrary patent trolls. It’s currently impossible to release any software in the mobile/tablet space and not be exposed to the risk of becoming a victim of a patent troll. Since I do not have the funds (millions of dollars) to challenge any patent suit that might come my way I have to accept that my business might be obliterated at any moment by one or more patent trolls. It’s a horrible state of affairs but our government has shown no signs of any useful reform so it is a risk of doing business. A risk that certainly stifles innovation, the opposite of what a patent is supposed to do.

  6. #6 |  ricketson | 

    If we try to reason this out, the first conclusion is that the people who decide to establish corporations apparently benefit from these laws. If they are benefiting, is it at the expense of the public? Considering Ken’s scenario above, it seems that the LLC is just an accounting tool for separating commercial profits from personal wealth, thereby allowing the claims arising from commercial lawsuits (such as IP, or business loans) to be limited to the commercial profits. That seems fair. I don’t know if they provide any protection against lawsuits that relate to activities that are not purely “commercial” — for instance, is a reckless driver still personally liable for injuries that he causes during the course of his employment (and using company equipment)?

  7. #7 |  Rod Flash | 

    I agree with Stephen and Ken. As the owner of an extremely small business I would never have started it without the ability to shield my personal finances from my business ones. They should be seperate. I know that at the large corporate level this ability is abused, but i’s still necessary. I’ve read many times that small to medium business is the backbone of the economy, and I don’t think it would be anywhere near as robust without the protections incorporation affords. And I don’t see anything unlibertarian about being able to shield personal finances from business ones. You are still liable for your actions, to the extent of the value of the business. Just as you are in your personal life with your personal assets.

  8. #8 |  Wiseburn | 

    Allowing people to limit their liability to the amount they invest, encourages them to take a chances on new Ideas. Why should an entrepreneur have to put their house, livelihood and savings at risk in order to try something new.

  9. #9 |  ricketson | 

    I think most of the public debate focuses on the joint-stock company, not LLC as an accounting tool for small business.

  10. #10 |  ricketson | 

    Correction… “joint-stock” is the wrong term for what I mean (I mean big LLCs where ownership can be partitioned to raise capital). That’s what I get for using Wikipedia to verify my vocabulary (apparently joint-stock has different meanings inside the US than elsewhere).

  11. #11 |  Sean D Sorrentino | 

    This makes the same error that Campaign Finance Reform makes. It mistakes the effect for the cause. Corps give money to the government because the government can give them things of value in return. The issue isn’t rent seeking, the issue is that there are rents available to be sought. The problem is too much government power to choose winners and losers, and reducing that power is the proper libertarian choice.

  12. #12 |  Whappan? | 

    Limited liability is primarily to shield passive investors, i.e. stockholders. Would you buy stocks if you could be sued for everything you have as a result of the actions of anybody in any of the companies you bought stock in?

  13. #13 |  Randall M. | 

    One of the subtle ways government influences the economy–the whole thing, in a very foundational way–is by determining the kinds of business arrangements that are permissible. You’ve named them in the post. Is there any a priori reason why those few should be the only kinds of business organization?

    The other commenters have mentioned already the benefit of corporate organization, but this is a defensive benefit against other government-enabled entities. In a free market, there wouldn’t be patent trolls. (I know, I know, I’m not holding my breath.)

    In the free market, we don’t know what kinds of organization would replace corporations as we currently know them. We could guess, of course. We could look at co-ops and other things that exist currently and extrapolate from them. But most likely, if the market were ever freed, we’d hardly see all the different kinds of organizations coming.

    Pop culture reference: think of the diner scene in My Cousin Vinny. There are three menu options: breakfast, lunch, dinner. Now imagine the actual world of culinary options. You’ve got something like the scope of the puzzle now.

  14. #14 |  Gavin | 

    I’m no expert on the history of corporations, but weren’t corporate charters granted for limited purposes and for limited times? I don’t think permanent corporations were originally anticipated. I wonder if there is a consistent way to differentiate between large corporations with shareholders and public stock from LLCs used to protect small businesses?

  15. #15 |  Irving Washington | 

    May I suggest that this is not, in fact, an interesting question? If there’s no way to invest without liability, there will simply be a massive reduction in investment. There are about a hundred other reasons why the corporation takes the form it does (in fact, there’s a class devoted to that subject at every university in the country), but for me, that’s really the end of the inquiry.

    I would also suggest that corporate power in the political system is a problem with the political system and not the corporation.

  16. #16 |  skunky | 

    I have always thought that if society provides protection to owners of corporations in the form of limited liability (and “personhood”), corporations have an obligation to make a contribution to society as a whole, outside of their “obligations” to their shareholders.

    Rather than abolish corporations (which didn’t exist until fairly recently in human history), why don’t we just make sure they have other things that go along with personhood, like limited life spans, and an obligation to return capital to the investors in the form of dividends should their cash hoards grow (I’m looking at you, Apple!). This used to be the case in the 1950s (? sorry, anecdotal, no citation ?).

  17. #17 |  ricketson | 

    “I have always thought that if society provides protection to owners of corporations …corporations have an obligation to make a contribution to society as a whole, outside of their “obligations” to their shareholders.”

    Skunky, how about they get taxed?

    p.s. before you guys get excited about the distinction between the state and society, keep in mind that any discussion about reforms like this kinda assume that the state legitimately represents the broader society that it governs.

  18. #18 |  Tom Kirkendall | 

    Sorry, Radley. Your instincts are usually spot-on, but they are wrong on this particular issue.

    Nicholas Murray Butler, president of Columbia University and winner of the Nobel Peace Prize, wrote that: “The limited liability corporation is the greatest single discovery of modern times. Even steam and electricity are less important than the limited liability company.”

    Journalists John Micklethwait and Adrian Wooldridge, authors of the excellent “The Company,” contend that the corporation is “the basis of the prosperity of the West and the best hope for the future of the rest of the world.”

    Stephen Bainbridge of UCLA Law School has argued persuasively that the limited liability company has proven to be a powerful engine for focusing the efforts of individuals to maintain economic liberty. Because tyranny is far more likely to come from the public sector than the private, those who for selfish reasons strive to maintain both a democratic capitalist society and a substantial sphere of economic liberty serve the public interest. Put another way, private property and freedom of contract were “indispensable if private business corporations were to come into existence.” In turn, by providing centers of power separate from government, corporations give “liberty economic substance over and against the state.”

    Bainbridge asks his students the following question each semester: “What explains the relatively rapid development in the mid-19th century of a recognizably modern corporation and, in turn, that entity’s emergence as the dominant form of economic organization?”

    The answer has to do with new technologies – especially the railroad – requiring vast amounts of capital, the advantages such large firms derived from economies of scale, the emergence of limited liability that made it practicable to raise large sums from numerous passive investors, and the rise of professional management.

    For the most part, these advantages remain true today. The corporation remains the engine of economic growth, both at the level of giants such as Apple and garage-based start-ups.

    Finally, the rise of the limited liability company has improved the living standards of millions of ordinary people. The rising prosperity made possible by the tremendous new wealth created by industrial corporations was a major factor in destroying arbitrary class distinctions, as well as enhancing personal and social mobility. Many of the wealthiest businessman of the latter half of the 19th Century and the 20th Century began their careers as laborers rather than as scions of coupon-clipping plutocrats.

    In view of the foregoing, Professor Bainbridge puts it to his students this way: “You want to help make society a better place? You want to eliminate poverty? Become a corporate lawyer. Help businesses grow, so that they can create jobs and provide goods and services that make people’s lives better.”

    Not bad advice.

  19. #19 |  ricketson | 

    “May I suggest that this is not, in fact, an interesting question? If there’s no way to invest without liability, there will simply be a massive reduction in investment”

    So people just wouldn’t work? Or everyone would use primitive tools?

    I think this would just change the way that we invest. For instance, people may make loans rather than buy stocks.

  20. #20 |  Carl-Bear | 

    [Sometimes I just can’t resist playing troll.]

    If I understand correctly, Ken et al support the LLC concept because it protects the owner’s personal assets separately from the business assets.

    This would seem to put them on par with a typical employee: a lowly file clerk isn’t going to be held responsible for insider trading (let’s discuss that one another day) by the LLC partners. But the file clerk also isn’t — usually — getting the same share of profits et cetera that a partner does. Should LLCs be eliminated, or the status of employees changed?

    If an LLC owner commits a crime through his company (Example for sake of argument: sends employees out to torch a competitor’s offices. Yes, I realize that exampe is a stretch under current USA laws, but we seem to be discussing principles.), should he go to prison, or just his company?

    Now the troll stretches a little further: Radley often writes about police misconduct. Usually, when there’s any recourse, the victim sues a municipality. Some people (I’ve said it myself) think the individual misbehaving officers should be sued personally; the argument often being that until the _officer_ faces repercussions beyond a paid vacation he won’t change his behavior. But oh so often he is shielded by “sovereign immunity”, and only the city takes the rap.

    Question(s): Does sovereign immunity differ from corporate immunity? If so, how? If so, _why_? Should individual cops be sued? Should LLC _owners_ be sued? In either case, wouldn’t a hypothetical “innocent” family suffer for the actions of the cop/owner?


  21. #21 |  BSK | 

    The protections afforded to LLCs was one of the major problems I had with the supreme court decision that corporations enjoyed the same rights as people. The fact that they don’t face the same consequences as people makes it immediately apparent that they shouldn’t enjoy the same rights.

  22. #22 |  Len | 

    Stephen Kinsella discusses this at the Libertarian Standard….

  23. #23 |  Carl-Bear | 


    Catching up with other comments, I see the argument that people will tend to limit investment if they share liability (correct me if I’ve mistaken the position).

    So: Extreme example again. Investors gives money to corporation which uses it to maximize investor profits by illegally bribing legislators or (see above) torching the competition. Stockholders (or LLC owner) is shielded from personal responsibility.

    Question(s): If one were to pay a hit man to commit a murder, would the client be shielded simply because he only invested in a hit man? Can (or should) the hit man gain immunity by incorporating? Do stockholders share responsibility for the actions of publicly traded Assassinations R US, Inc.? Do stockholders share that responsibility if a _broker_ invest their money in ARU?

    The examples may seem extreme, but I think they are logical extensions of the general liability argument.


  24. #24 |  Cornellian | 

    We want people to invest in things, and if you can’t invest $100 in something without putting everything you own at risk, then you’re not going to invest anything. Hence, the limited liability corporation is an essential feature of our economy. Part of the reason that economies in other parts of the world have a hard time developing is precisely because they don’t have the well developed corporate framework for investment that we have here in America (and, of course, elsewhere in Europe, Canada, Australia etc.).

    Of course, there are all kinds of things one can do to improve corporate governance without changing the limited liability feature. But the limited liability feature is essential. We wouldn’t have much of an economy without it.

    Contra one of the above commenters, loans are not a substitute. We can already lend money to corporations – that’s what we do when we buy corporate bonds. But that’s a loan for a fixed return, not a share in ownership that increases in value as the corporation gets more successful and that gives you a say in the control of the corporation.

  25. #25 |  BSK | 

    People are talking about having their personal finances protected. Sorry, but that doesn’t fly with me. Break the law and you should be held liable. Adding LLC to your name shouldn’t shield you from taking responsibility.

  26. #26 |  John Hall | 

    I really like a lot of work Stephen Kinsella has done on libertarian theories of contracts. He just wrote a paper on corporate personhood that’s directly relevant to this discussion.

    I see no problem with an LLC in libertarian theory. It is really just a contract and a corporation is really just a bundle of contracts and relationships.

    Saying you’re an LLC would be like adding in a line to every debt agreement that in the event that you fail to perform on the debt the LLC can only be sued for the assets of the LLC and not the owners. People would decide whether to form an LLC vs another type of company based on the risks. You may have to pay a higher interest rate if you’re an LLC or other things, but people would have to weigh the decision.

    This is a separate issue from torts more generally. Kinsella uses the example of a truck driver employed by a truck company who hits someone in the course of duty. This is called respondeat superior and Kinsella doesn’t care for it. However, I think that in a libertarian society, the truck company would likely offer to assume the torts from the truck driver and buy insurance for all of them. Actually there would be two issues, one where the driver is negligent and the other where the truck is faulty, the truck driver shouldn’t have to pay anything if there is a problem with the truck.

    It might be clearer to see why many companies would offer insurance by considering an airline pilot or a container ship driver. Any case where there is a small risk of damages so large that it would bankrupt the person responsible. In the airline case, if the crashed plane hits a home, then those people would want to be able to get money and the pilot would need insurance to cover that. Obviously, the people who flew on the plane would also want to make sure the pilot has insurance such that their estates are able to get some payout in the event of a crash before they even get on. However, that kind of insurance would be massively expensive for one pilot, so no one would want to be one on their own. The airline would be in a better position to manage that risk and would offer to assume any torts as a result of pilot negligence.

  27. #27 |  Mike | 

    I think a big question here is are we talking real world or theoretical libertopia? Libertopia I’d say people can have limited liability with respect to contracts that they sign and people that have agreed to go into a contractual arrangement with them with the understanding of limited liability, but not for externalities for people who are not party to any contracts.

    In the real world however I think that we individually have so much power over the world that limited liability might be necessary for conducting business. My hunch is that it is overused and abused, but I don’t know the law well enough to be sure. An intelligent, efficient, and robust regulatory framework could work wonders, but of course that might not be an option at all

  28. #28 |  John Jenkins | 

    All I can say is there is a lot of misinformation in this thread, but to slay two dragons: limited liability has nothing to do with criminal acts and the Supreme Court has never held that a corporation has the same rights as an individual. In fact, it has explicitly held the opposite with regard to the P or I clause, and other rights. It has held that corporations share some rights (1A rights, for example) with individuals.

    There are a lot of different types of business organization that offer various forms of liability protection: corporations (limited liability by definition), limited liability companies (not a corporate form), limited partnerships (limited liability except for the general partners), general partnerships (no limited liability), limited liability partnerships (like an LP, except even the ostensible GP has limited liability).

    To answer another question: yes, corporations or other entities can be liable for their employees’ torts when committed in the execution of their duties (so, AT&T could be liable to you if the driver of an AT&T van hits your car in a parking lot), through vicarious liability. What limited liability does is insulate the shareholders from the corporation’s liabilities (in most cases).

    The primary function of limited liability vehicles is to allow the aggregation of smaller investors who don’t individually have a lot of money to put into the company, but who in the aggregate can fund a business. Limiting liability to the amount invested favors risk-taking in a way that I think is valuable (but others might disagree) for those small investors in new businesses. There are doctrines that deal with thinly capitalized companies and liabilities to involuntary creditors (e.g., tort creditors). Publicly traded corporations allow you to spread that risk even further.

    Corporations have NO DUTIES to their shareholders. The corporation IS the shareholders. The officers and directors of the corporation have fiduciary duties to the shareholders (duty of loyalty and duty of care). The content of those duties (at least under Delaware law) is based on caselaw, but the latitude afforded management in its decisions is very, very broad. That is an attempt to solve the problem of divergent interests between the agent and principals (the classic agency problem), and has nothing at all to say about corporate societal obligations (e.g., corporations can and do make charitable contributions from corporate funds).

  29. #29 |  Corkscrew | 

    I think it’s worth remembering why the LLC was invented in the first place. According to my old Economics prof, it dates back to the South Sea Company – one of the most infamous corporate scams in history. When its CEO absconded with all the company’s funds, large numbers of other companies – shipbuilders etc – didn’t get paid. They did their best to take it out of the hides of the shareholders.

    This resulted in a serious credit crunch. Every other shareholder in the country realised they were on the hook for everything that their companies got up to, and suddenly they couldn’t sell shares fast enough. The introduction of LLCs was part of the package of rescue measures designed to

    Without the “liability firebreak” permitted by an LLC, you personally could be on the hook if your pension scheme invests in a tracker fund that invests in an OEIC that invests in a company that has a subsidiary where someone managed to run up a huge bill. You could lose not only the value of your pension but also everything else you own, simply because you trusted someone who trusted someone who trusted someone who trusted the wrong person. That sort of thing does not instil trust in the financial system.

  30. #30 |  SJE | 

    LLC are one of the best inventions of the West, and have been an important factor in the growth of the Western world. The problem is not the LLC, per se, but how much immunity from liability you grant to the officers of the corporation. Indeed, a lot of the worst excesses of the mortgage mess were enabled by laws that specifically shielded bankers from fraud laws that would have landed them in jail two decades ago.

    As for the corruption that can occur with LLCs getting in bed with govt: the same thing happened with all sorts of other corporate forms in the past. It is more a function of power.

  31. #31 |  homeboy | 

    Radley, I think you should have asked, “Should we abolish…limited liability [for] corporation[s]?” I think that would have prevented much of the discussion of LLC’s and personal vesting in operations/holdings that has debased the value of this thread.

  32. #32 |  Rich | 

    “Just from observation, it seems to me that the kinds of people who rise up to lead publicly-held corporations tend take a pretty namby-pamby, go-along-to-get-along approach to free markets.”

    There is at least one glorious exception. The first guy that popped into my head is T.J. Rodgers the CEO of Cypress Semiconductors.

    Several years ago, a nun took him to task for not having any women or minorities as company directors.

    His response was a thing of beauty.

  33. #33 |  BSK | 


    Then people should be more careful with who they trust their money to. If investment only happens when risk is mitigated, then maybe the investment wasn’t sound in the first place.

  34. #34 |  BSK | 


    That letter spins wildly off base. I can think of many more apt descriptors for it than “thing of beauty”.

  35. #35 |  Warren | 

    In Scotland from around 100 to 1848 they had unlimited liability in their banking. Many banks issued their own currency and had gold reserves of around 2% yet in spite of a few bank failures there were no bank panics or runs on banks and the reason was that depositors knew there was little risk to their funds.

    An insolvent bank would first lose their gold reserves, then their interest bearing capital and other assets of the bank would be sold off and then the personal wealth of the stockholders would be tapped until the obligations were covered.

    The potential losses to the stock holders was unlimited but was proportional to the amount of stock owned.

    It was a very successful system in the main because the unlimited liability made for a very conservative and risk adverse group of bankers. They had little margin for error so they could not afford to be any other way.

  36. #36 |  Warren | 

    That should be from around 1700 to 1848.

  37. #37 |  damaged justice | 

    Equal rights for all, special privileges for none.

  38. #38 |  Libertarianism v. corporatism | Disasterism | 

    […] From Radley Balko: Sunday Discussion: Should We Abolish the Limited Liability Corporation? […]

  39. #39 |  B | 

    “We libertarians are regularly accused of being corporatists, despite a wealth of evidence to the contrary.”

    This probably has something to do with the number of corporatists that refer to themselves as “libertarian”, as well as conflation of being “pro-business” with being “pro-free market”. A lot of people just don’t have time/energy/inclination/smarts to parse the nuances, there.

  40. #40 |  EH | 

    If shareholders were called to account for a corporations actions, there would probably be fewer crappy corporations.

  41. #41 |  Wade | 

    I’m not sure that abolishing all corporations (limited liability corporation is a term of art for a specific type of privately held corporation) would solve any of the problems with regulatory capture or undue influence in government. Just ask yourself, if Steve Jobs or Bill Gates were sole proprietors or involved in partnerships, do you think that they would have any less ability to earn scads of money? And once they have those millions or billions, what stops them, as individuals, from bribing government officials with direct payments or promises of post-retirement jobs? As to the issue with liability, what would prevent the super-rich sole proprietors or partner from obtaining sufficient insurance to insulate them from individual liability?

    The anti-corporate movement is a great example of misdirection. Government expands into every aspect of life.. Business, Corporations and sole proprietors, have no choice but to pay the mordida to get things done… people blame corporations for having too much influence in government. If our nation had stuck to the Constitutional limits placed on government there would be considerably less interference with government by businesses because the businesses would not need to buy Congressmen and regulators to get their work done.

  42. #42 |  Troy | 

    No. What #9, #22, and #23 said.

  43. #43 |  JohnJ | 

    Absolutely! If someone wants to form a corporation without government benefits, that’s fine. But the government doesn’t need to create special incentives for corporations.

  44. #44 |  Xenocles | 

    “If one were to pay a hit man to commit a murder, would the client be shielded simply because he only invested in a hit man? Can (or should) the hit man gain immunity by incorporating?”

    In the first case, the relationship looks more like a client/provider one, so there is no immunity. In the second, I think the governing legal principal should be the one that nullifies contracts that involve illegal activity. As there can be no contract to commit crimes, likewise there can be no corporate charter to create a criminal enterprise. Indeed, in some cases even the solicitation for the goods or services is proscribed (for good or ill), so I don’t think you could set up a murder firm in a way that protects its customers and agents from criminal liability.

    Now, depending on what actual investors knew or should have known, you could make a case for shielding them for criminal prosecution. If Murder Inc. puts out a prospectus making itself out to be a flower delivery service, I would not prosecute the investors (though the investment would be forfeit when the walls came down). On the other hand, if an investor knows what his company is doing then he is arguably part of a conspiracy by knowingly providing material support (his investment) and receiving a benefit from the illegal act (capital gains and dividends).

  45. #45 |  Mel | 

    Yes. End limited liability.

    It is not true that investments would evaporate. People would invest more carefully. They would pay more attention to what the people in the companies did. Some enterprising insurance company would sell investor insurance to cover their asses. We could use a little less gambling and a little more investment in the real economy.

    Alternatively, if you think that investment would perish without government protection, then at the very least that protection should be scrutinizable and revocable (in practice, not just in theory).

    P.S. Limited liability does not necessarily protect employees. For instance, I am personally responsible if I screw up anyone’s pension contributions.

  46. #46 |  Bill | 


    And individual owning a LLC does not have immunity from illegal activity and can be prosecuted for those acts. The only thing protected are personal assests and those are also subject if fraud has been committed.

  47. #47 |  Juice | 

    Almost every for-profit corporation is legally obligated to maximize value for the shareholders. This is the main problem, IMO, not limited liability. There could be (and are in a few places) a different kind of corporate charter, usually called a Benefit Corporation, or B-Corporation, where the “common good” or community benefit takes priority alongside shareholder profit.

    If we had more of these, things would be better. Or, at least offer a kind of corporate charter where the corporation cannot be sued by the shareholder for doing something that’s obviously wrong or destructive for the sake of the bottom line.

  48. #48 |  Scott Clark | 

    Not to mention that their are cases where you can pierce the corporate veil. And cases where you can pierce the corporate veil in reverse where you can attach a corporate owned asset because of a liability of an individual.

  49. #49 |  Trey | 

    Limited liability is a virtually free benefit to stockholders. Giving this free benefit to one group of people involves taking away something from others and is therefore completely against libertarian principles.

    A reasonable and libertarian alternative is proportional liability. With proportional liability your financial responsibility is proportional to your ownership share. So when you join together with 100 or 1000 others to fund a company, your risk is shared as your share of the profits is shared.

    The huge problem today with the corporate regime is that heads they win and tails they still do okay and go on and start another enterprise to take advantage of the system. A lot of ethically challenged people got paid a lot of money before Solyndra or Enron ever filed bankruptcy, and many of those same people are back doing the same things now elsewhere.

    With proportional liability there would be potential real pain for stockholders if the company gets out of control. All of us would look much longer and harder at any company we invest in.

    As for you “proprietors” that have formed corporations to avoid personal liability, congratulations. You have conformed to the incentives available. You may be engaging in risky practices that are detrimental to your employees or community, I know I did when I was in exactly that position.

    With proportional liability, an entire industry of shareholder insurance will arise and the price of shareholder insurance will become a leading indicator and watchdog on corporate practices.

    There is no free lunch, virtually free limited liability takes from one and gives to another and is at the heart of what ails our society.

  50. #50 |  GregS | 

    The LLC is just a legislatively acknowledged version of an entity that would arise anyway through the common law. That makes it unobjectionable, in my opinion. If the LLC IS something that would arise naturally through the agreements of individuals, there is no strong reason for libertarians to dislike it.

    It is impossible for a business person to get consent from everyone he may commit a tort against ahead of time, before starting his business. A good common-law rule might be, “If I commit a large tort in the course of doing business, you can sue me for my business assets. You can’t sue me for my house.” I think this is a good rule.

    If a company commits a tort, should anyone owning stock be liable for more than the value of their stock if the company? If “yes,” then suddenly every stock-holder in existence has a fairly large due-diligence requirement. Common-law rules are supposed to make society function more efficiently, and cut out this sort of duplicated effort.

    Don’t get me wrong; it seems like the wrong rule here could either encourage too much recklessness or discourage too much commerce. My gut tells me the cost-benefit analysis comes down in favor of the LLC existing.