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?

    [/troll]

  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….

    http://www.libertarianstandard.com/2011/10/18/corporate-personhood-limited-liability-and-double-taxation/

  23. #23 |  Carl-Bear | 

    [troll]

    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.

    [/troll]

  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.
    http://www.libertarianstandard.com/2011/10/18/corporate-personhood-limited-liability-and-double-taxation/

    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.

    http://www.cypress.com/?rID=34986

  33. #33 |  BSK | 

    Corkscrew-

    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 | 

    Rich-

    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 | 

    Carl-Bear

    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.

  51. #51 |  Cornellian | 

    “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.”

    Limited liability wouldn’t protect either the hit man or the guy who hired him from being convicted of conspiracy to commit murder. That’s not how limited liability works – it has never protected your from the consequences of your own acts.

    Consider this alternate hypothetical example – An IBM manager in China bribes a local official to secure a contract. IBM is convicted in the United States under the Foreign Corrupt Practices Act and fined $10 million dollars. Should your personal assets be on the hook for that amount because you own one share in IBM (current market value $100)? To the commenters above who suggest you should just take more care in making your investments, exactly what could a shareholder do to avoid this scenario other than not investing? Demand a personal interview with the board of directors and senior management before purchasing that one share from a stock broker?

  52. #52 |  croaker | 

    The New Professionalism: Another Isolated Incident

    http://www.katu.com/news/local/132263363.html

  53. #53 |  supercat | 

    In some sense, it would be ideal if individuals and companies could not expose others to downside risks without those others’ consent (which would not generally be given without a sufficient share in upside profits or other payment appropriate to cover such risk). Certainly, too great an ability to shift downside risks onto non-consenting parties will make an economy unstable. I don’t see limiting corporate liability in general, though, as being a particular problem.

    Admittedly, offering limited liability corporations the ability to settle any non-criminal tort by a full surrender of corporate assets, without attaching shareholders’ assets attached, exposes potential injured parties to risks for which they are not adequately compensated. In practice, though, shareholders usually face enough personal risk that it is in their best interest to minimize the amount of risk that would be spread to others. If a corporation with $10M in assets would consider an action that may cause $20M of damage to others, for which it would be liable, those others would be exposed to $10M of uncompensated downside risk, but it would be in the corporation’s best interest to do almost everything possible to minimize the probability of such a catastrophe occurring. Consequently, the danger of anyone actually having to suffer $20M in damages, with only half of that being compensated, would be pretty slight.

    What makes the system unstable is when individuals or companies can shift enough of the downside risks away from themselves that they become able to harness it. Imagine the following two people visit Monte Carlo. Betty is given $1,000, on condition that she bet it on one spin, but if she wins she’ll keep any winnings, including the original bet (so she’d be receiving a $1,000 gift, but bear the full upside and downside of her bit). Jack is offered a $1,000 free-roll for one spin at the Roulette wheel, but if he wins, he has to pay back $1,000; if he loses, he pays back nothing. Jack hasn’t received an outright gift–merely a cover for his losses.

    Betty would be best served by placing an even-money bet, on which the house vigorish in Monte Carlo is 1.35%(*). She’d have a 48.65% chance of ending up with $2,000 and a 1.35% chance of winning $1,000, for an average expected value of $986.50. If Jack placed an even-money bet, though, he’d have a 48.65% chance of winning $2,000 and keeping $1,000, a 1.35% chance of winning $1,000 but keeping none of it, and a 50% chance of losing $1,000 of his benefactor’s money–an expected value for Jack of $486.50. He’d be much better off placing a single-number bet. The vigorish on such bets is twice that of even-money bets (i.e. about 2.7%) but he’d have a 2.7% chance of winning $35,000 beyond the $1,000 payback, for an expected value (to Jack) of $9459.50. Note, however, that while an even-money bet would have cost Jack’s benefactor an expected cost of $500, the single-number bet will cast the benefactor an average of $971.43 Effectively, what’s happening is that in the former case, Jack is wagering with $500 of his benefactor’s money; in the latter case, he’s wagering with $971.43 of it. The bigger the downside risk, the more of the benefactor’s money Jack gets to wager with.

    (*) Casinos in Las Vegas and many other places hava a 5.2% house edge for all bets on their roulette wheels; Monte Carlo’s rules take a lower house edge for even-money bets.

  54. #54 |  Jim March | 

    Well right now, if you’re going to invest in, say, 10% of a company, you get advice from various sources as to how the outfit is doing – financial audits for starters, more formal stuff it it’s a bigger group.

    IF you were going to be legally liable for 10% of the company’s misdeeds, then your investment info has to include the known ethical standards of the major corporate officers at a minimum. THAT would get audited with just as much care as the financial audits happen now.

    So…yeah, tell me again how that’s a bad thing?

    See, the investors are *supposed* to have input into who the managers of the company are. Right now, under the LLC system investors gain (heavily!) from having outright psychopaths as corporate CEOs. It’s practically a job requirement. So if the investors are liable, then that current attitude of “hire cut-throat CEOs” goes flying out the window with it’s ass on fire.

    I see a hell of a lot of upside here to ending the LLC conc

  55. #55 |  Jim March | 

    …”concept”, that was supposed to be…

  56. #56 |  yonemoto | 

    I think a good compromise is to abolish the federal individual income tax and focus taxation on interstate corporations, thinking of taxation as a “use fee” for having shielded liability. The nice thing is that the concept works well with parameters of constiutionality and general notion of jurisdiction, and shifts the balance back to small, intrastate LLCs, and partnerships.

    If taxation is feared because it will shift jobs abroad, simply enact a flat tariff that is half the corporate tax (since the tariff will be levied on gross and the the tax on profit).

  57. #57 |  Jeff | 

    Responding to BSK (and others) who state:

    “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.”

    If I had any hope of actually knowing if my software was violating a patent (even with unlimited funds and IP lawyers it is impossible to know) AND if the patent system was not fundamentally broken this attitude might make sense. However, neither of these things are true. Without an LLC I, and thousands, of other small indie software developers would be forced to close up shop.

    As is typical, bad/over-reaching government policy is the root cause of the problems.

  58. #58 |  Neil | 

    Sean Sorrentino has the right of it (and as an Ex-pat North Carolinian I’m happy to say it). People and corporations will act as they see their best interests, and always have. Place or rent seeking has always been the bane of the sovereign, but is only so because the sovereign has the power to grant rights, place, monopolies, etc. If there were no advantage to be had in rent seeking because there were no favors to be handed out, then no one (corporations included) would spend time or money in seeking them.

    The benefits of having the limited liability associated with corporations have been adequately dealt with above, but let me add to the argument by hyperbole. The reason for limiting liability is to protect folks from putting too much on the line when pursuing a new idea. The reason being that if an enterprise fails then the entrepreneur is not ruined, whereas with unlimited liability then the individual stands personally responsible for all debts. Should you then be able to jail those people who lack the funds to stand for their debts?

  59. #59 |  Garrett J | 

    In response to Carl-Bear (the “troll”):

    There’s a legal doctrine called piercing the corporate veil which allows the law to reach the personal assets of shareholders in closely held corporations. The doctrine exists very specifically for the purposes of preventing people from using limited corporate liability as a shield for wrong doing.

    In response to the hit man example, hiring a hit man is in and of itself a felony – an individual doing so would be criminally liable. A concerted effort by major decision makers within a corporation to hire a hit man would mean the same criminal liability and potential conspiracy charges for all those involved.

    It seems to me that so much of the worries about “corporations” are in no small part related to fundamental misunderstandings about what corporations are. Corporations, both large and small, are like mini-nations; Shareholders are the voting citizens, while the board of directors, the CEO, and all the other corporate officers and decision makers are the politicians. The fact that we get lousy CEO’s and lousy outcomes is no more evidence that we need to change the corporate form than lousy politicians and lousy wars in Iraq are evidence we need to change democracy.

    As some have mentioned already, limited liability is a necessity for a vibrant economy – without limited liability, the wealthy would simply hoard their wealth, not producing goods and services and not investing in other businesses.

  60. #60 |  Garrett J | 

    And in response to 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.”):

    What exactly does breaking the law mean? Is coming out on the wrong side of a contractual dispute akin to “breaking the law?” Is being subject to a slip-and-fall tort mean you are a lawbreaker? These tend to be the sorts of issues limited liability was designed for. When someone slips and falls outside of Bob’s Burgers, we don’t want that victim to be able to take Bob’s home. And when someone slips and falls outside a Target, we don’t want that victim to be able to reach the personal assets of Target’s shareholders.

    Egregious lawbreakers aren’t protected from liability nor are they protected from criminal prosecution. For those who wonder why it tends to be so hard to nail corporate criminals, the problem isn’t the corporate form or limited corporate liability, the problem is that it’s hard to nail any powerful criminals (think Al Capone or Stringer Bell). Having a Constitution that protects individual rights means you can’t send dastardly CEO’s to jail without proving their personal culpability beyond a reasonable doubt.

  61. #61 |  C. S. P. Schofield | 

    To go off on a tangent; I think a lot of the “no responsibility to society” that everyone complains of in Corporations is an outgrowth, in part, of the death tax. The death tax was instituted to break up family wealth, on the grounds that it was iniquitous for a father to pass what he had built intact to his son. There are certainly enough historical examples of wastrel heirs to make this feeling understandable, but one of the side effects, it seems to me, is that after one generation a major enterprise will almost necessarily fall into the hands of the bean counters. Basically, there’s nobody in a position to say; “What the hell do you think you are doing? My NAME is on the building! I don’t want people to think I act like that!”

    My favorite example of this happened some years back when a man who found the “Instant Win” $1,000,000 game piece from the current McDonald’s Monopoly game gave the piece to his pastor, and McDonald’s initial reaction was to say “They are non-transferable, so we aren’t going to pay it.” I never met Ray Kroc, but I strongly suspect that had he been alive and at the helm, he would have scotched that idiocy before the first press release, recognizing it as, if nothing else, a public relations disaster far more expensive than paying out a million out of pocket.

    Also, when you get down to it, what can you imagine some born-with-a-silver-spoon-in-his-mouth idiot doing with inherited wealth that is likely to do more damage to society than what the State would do with the same funds?

  62. #62 |  TGGP | 

    I remember this being a dispute that popped up at Mises.org with reference to Kevin Carson and suchlike. I was undecided then and still undecided now.

  63. #63 |  albatross | 

    Are there any first world countries that dont have limited liability for investors? I assume the result would simply be that people buy long-duration bonds instead of stock to invest in the company.

  64. #64 |  Kevin | 

    For a “libertarian” web site, there seems to be a marked lack of regard for private property by some of the posters. At any rate, I am a partner in a small (two people) LLC. I can tell you that I would have never gone into business if I thought that a single litigious client could take my home and everything else I own.

  65. #65 |  JohnJ | 

    Kevin has a good point. Limited liability was developed in response to frivolous litigation. Elimination of limited liability should be accompanied by lawsuit reform that protects individuals from being sued merely for selling a product that could not be reasonably foreseen to cause injury.

  66. #66 |  Murc | 

    @Kevin-

    Some of us who read, and occasionally comment here, aren’t libertarians. Or at least aren’t pure libertarians. I’m a pretty hardcore civil libertarian, to the point that I think the FCC should be abolished, but on economic issues I tend to be super left-wing. Radley has in fact made gentle mock of this divergence among some members of his readers and commentariat on numerous instances.

    @JohnJ-

    Doesn’t that sort of impose a catch-22, tho? Suppose I buy something that couldn’t be reasonably forseen to cause injury, but, when used properly, it does. I sort of feel like the person or company to whom I gave money in exchange for a deficient product should make me whole again. In your scenario there’s not a company to hold accountable and the person is shielded as well.

  67. #67 |  TC | 

    Well the first paragraph of the first covered it very accurately.

    Ir’s as close to the protections of a trust that any business can take to protect themselves from the law that lawyers wrote to enable themselves to steal from you and hand their clients a few shillings from the rape.

    Johnj and Kevin are also correct. None of us involved in LLc’s, well at least the folks I’ve ever been associated with did so to make criminal activity easier. It’s mere a legal tool to protect you own ass. It also not wrong! Can it be misused? Ask wall street “too big to fail” firms. None of which are LLC’s.

    An LLC merely limits liability to the assetts of the company involved. They can’t get a claim again your home, your babies, cars or any of your personal property. Just such that is claimed and owned by the LLC.

    Nothing wrong with that..

    Call it a citizens Tort Reform. Gawd know the attorneys will never act on real tort reform. So it got handled with more laws n shit!

  68. #68 |  Thomas L. Knapp | 

    Several people have already pointed out what would likely replace “limited liability” in a freed market: Insurance.

    Right now, a portion of prospective liability is externalized to the victim of the hypothetical tort. Do a million and one dollars worth of damage to someone, and if there’s only a million bucks worth of assets in the corporation, that dollar bill in your wallet is “protected” at the victim’s expense. It’s partial socialization of risk coupled with total privatization of profit. Nice con.

    Get rid of artificial state-mandated limited liability for a privileged class, and insurers would almost certainly be Johnny-on-the-spot with policies. It’s true that that would increase the up-front cost of investing. Internalizing an externality does that.

  69. #69 |  Mark Z. | 

    IBM is convicted in the United States under the Foreign Corrupt Practices Act and fined $10 million dollars. Should your personal assets be on the hook for that amount because you own one share in IBM (current market value $100)?

    No…

    To the commenters above who suggest you should just take more care in making your investments, exactly what could a shareholder do to avoid this scenario other than not investing?

    And that’s why.

    The focus on nominal ownership by shareholders is misleading. Shareholders, as such, should be untouchable for liability purposes, because shareholders, as such, hardly make any decisions. The people whose personal assets should be on the line are the senior management.

    (It’s particularly silly to talk about personal liability attaching to someone who buys $100 in equity but not to a bank that extends IBM millions of dollars in credit. They’re both investors, and the bank has a far greater amount of control. I submit that it’s misleading to talk about shareholding as “ownership”.)

  70. #70 |  croaker | 

    @61 Another perfect example is WalMart. It is now doing things Sam Walton would never have countenanced.

  71. #71 |  m | 

    I think you have sample bias. At the state level, local level – corporations, LLCs, sole proprietorships and partnerships all rent seek – think licensing for one. At the federal level there are very small numbers of business entities that have the resources to compete other than corporations. Corporations solve a problem – continuance and are a good thing.

  72. #72 |  Stormy Dragon | 

    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 fact we’ve created a system where it’s easy to cheat does not absolve the people who do the cheating of moral responsibility, even if eliminating the opportunity if the most effective solution.

  73. #73 |  Boyd Durkin | 

    Late to the party, but let me put my statist businessman hat on: If you do away with LLC I will do one of two things:

    1. Seek an exemption (or favorable law) via money and politics
    2. Get the exact same thing as an LLC created (maybe call it a “Freedom Partnership”) via money and politics

    I will not: Abide by the spirit/intent that killed the LLC…as long as I have money and politics to use. I understand that sometimes my dear politicians must placate the masses. But that only slows our roll, it don’t stop it.

    My position: If you did away with the entire concept of limited liability (noting that “liability” is a key ingredient in all things libertarian and–arguably–all things AnCap) there would be a tremendous amount of pressure built up to “fix” many of the broken aspects of the global markets. This would be caused mostly by the businesses seeking to limit risk via innovation, rather than legislation (example: an end to patent trolls and state inspections that are just theater).

    I can tell you that I would have never gone into business if I thought that a single litigious client could take my home and everything else I own.

    A problem with litigation, not liability. Do away with the LLC and I’ll partner with your bank to provide appropriate insurance…and there will be significant political pressure to resolve the problem with frivolous litigation. However; in the case of things like the Station nightclub fire, I don’t think anyone would argue that the Derderians liability should be limited.

    Regarding the shareholder liability issue: capital markets have proven very adept at adjusting. Since no one would buy one share of a company and be exposed to the risk of complete liability, that model would no longer work. However; get past the notion that current stock markets must exist and you can see endless possibilities for capital investment vehicles. In other words…

    I submit that it’s misleading to talk about shareholding as “ownership”.

    …I agree.

  74. #74 |  Warren Bonesteel | 

    The very least that needs to be done is to deny corporations the legal fiction of ‘personhood.’

  75. #75 |  Corkscrew | 

    Get rid of artificial state-mandated limited liability for a privileged class, and insurers would almost certainly be Johnny-on-the-spot with policies. It’s true that that would increase the up-front cost of investing. Internalizing an externality does that.

    Insurance is a form of protection against events that are improbable (e.g. ships sinking, buildings catching fire, you dying in any particular year). Failure rates for startups are somewhere around the 30-40% mark. A startup protection policy would not actually count as insurance.

    This is not just word-play – most insurance companies would be unwilling to offer a policy on these terms. Only established companies would be able to get insurance, which would rather defeat the point.

    In practice, what I expect would happen is:

    1) Most new business initiatives would *have* to be affiliated with a pre-existing large company. This is pure corporatism and very anti-free-market.

    2) It would become a lot easier for large companies to slap down potential challengers. It’s easy to temporarily send the perceived value of a competitor negative (e.g. by filing a load of spurious lawsuits), and once that happened all its investors would start fighting to reach the exits. So markets would become winner-takes-all.

  76. #76 |  Edmond | 

    Unlimited liability would cripple the economy: total ownership/power resides in those able to spend the most on lawyers. Every asset you and your family owns is now fair game for some creative lawyer to use the countless laws and regulations to bury you in spurious lawsuits until you are left homeless.

    Patent trolls and shady lawyers on fishing expeditions will have a field day: not only can we destroy your business, but if you do not pay our demands, you put the very fate of your children and the children of your investors at risk fighting our spurious lawsuit.

    Limited liability does not give protection against criminal acts – such claims merely show a complete lack of understanding of business and law. What it does is protect your personal assets from business problems.

    Everyone takes a risk doing business with the LLC – if it goes belly up, they lost out, and cannot pursue the private assets of the owners. They understand this perfectly well, and take that risk (just as creditors do for individuals) – nobody if forcing someone to extend credit to LLCs against their will.

    I’m willing to risk some of what I have in starting a new business, but I will not risk making my children homeless (and if that is where the bar is set for risk, I would wager that most small businesses would never have been started). Without that protection, only the wealthiest individuals would ever take the risk of being an entrepreneur. If you think only a handful of wealthy individuals control too much of the economy as it is, just wait until they are the only ones capable of doing any business at all.

    I suppose the exception to that would be those just starting out on their own, who do not have any assets to lose – of course, few would risk lending to them, as they cannot contribute much to the business to begin with, and would risk them declaring bankruptcy (which I suppose has to go too, as that is also a way of avoiding liability for your debts – maybe give creditors the option of forcibly taking organs and selling them? putting you into indentured servitude? why should liability stop at just your possessions?).

  77. #77 |  ShelbyC | 

    “Patent trolls and shady lawyers on fishing expeditions will have a field day: not only can we destroy your business, but if you do not pay our demands, you put the very fate of your children and the children of your investors at risk fighting our spurious lawsuit.”

    I may be wrong, but you may not have any protection from that anyway, if you are the actual developer. If you personally violate a patent, you are probably personally liable, even if your company is an LLC. Just like, if you’re driving down the street doing work related stuff and you get in an accident, you are personally liable for any damage. Somone will correct me if I’m wrong, I’m sure.

  78. #78 |  Todd S. | 

    I may have missed this earlier in the thread, but given the current state of the U.S., if you elminated the corporate entity, would you not also have to convert to a loser-pays legal system?

  79. #79 |  Rob Lyman | 

    A key error that has been repeated over and over above: limited liability shields owners from liability for acts of the corporation/LLC/LLP. It does not shield officers (who are often, but now always shielded by agency law), nor does it shield employees for their own acts.

    Thus, if you personally do something illegal or tortious (crash the company truck), you personally can be sued. If you write an app that infringes a patent, you personally can be sued (although the damages against you may be minimal, because it’s really the selling of the app that’s an issue). And, in a striking and nonsensical inversion of normal agency principles, if you, as CEO (or a member of an LLC) cause the corporation to infringe a patent (or copyright), you personally can be sued for inducement of infringement.

    It should also be noted that the owners are liable for the torts of employees only through the somewhat artificial doctrine of respondeat superior. If I hire a guy through a rigorous process, drug test the heck out of him, give him a thorough training program with multiple tests and opportunities to wash out, and then send him out in the company truck, which he crashes in to a school bus, I’m liable, even though I did everything right. If you’re going to eliminate limited liability for owners, you should at the same time explain why the owner is liable for a tort he didn’t commit in the first place.

  80. #80 |  Devilbunny | 

    Why all the concern with torts? What about when a business just… fails? Businesses go bankrupt and are liquidated all the time. Should their shareholders be liable to lose their homes because they made a bad investment, or because they didn’t get out in time? What if (heaven forbid) they forgot that Grandpa had bought twenty shares of Smith-Corona for Junior when he was born? Should he have lost his house in 1995 when they filed bankruptcy?

  81. #81 |  Jess | 

    OK, I’m all for limits on liability, but I think we’re missing the point.

    However brutish, uncaring, and soul-destroying you perceive the federal bureaucracy to be, it is easily matched by that of a large corporation. If you have worked for AT&T, GM, Time-Warner, BofA, etc. as anything other than a C-level then you know how awful these statist constructs are, for those who inhabit them as well as for those who must deal with them.

    Humans should interact with each other as individuals. I know many people think that technological progress relies on the giant corporation, but that is just false. The effect of the giant corporation is to concentrate research in a few directions only, and that only retards progress.

  82. #82 |  Mel | 

    “IF you were going to be legally liable for 10% of the company’s misdeeds, then your investment info has to include the known ethical standards of the major corporate officers at a minimum. THAT would get audited with just as much care as the financial audits happen now.”

    Exactly.

    Re people talking about losing their house. It has been a couple decades since the IRS tried to take my families. But, as I recall, they were the only ones who had the horrible power to do that. Other people can put a lien on your property, if there is a judgment on you. But you can’t be kicked out of your primary residence.

    Re losing your money if you invest in a business that goes under. Why would anyone invest so much in a startup that it would risk everything they have? Especially if they had kids?

  83. #83 |  Davis | 

    I may be wrong, but you may not have any protection from that anyway, if you are the actual developer. If you personally violate a patent, you are probably personally liable, even if your company is an LLC.

    You’re both wrong and right, actually. Anyone who “makes, uses, offers to sell, or sells any patented invention” is liable for each act of infringement, and you as an individual have likely used (and possibly even made) the invention. However, your individual use probably only puts you on the hook for nominal damages; no patentee — troll or no — would invest in that lawsuit. Incidentally, that’s the only reason you don’t need to worry about being sued when you buy and use an infringing product — you are technically liable even as a consumer.

    It’s usually “sells” that gives rise to the big-money damages, and since it’s the LLC that’s doing the selling, it’s the only entity that has any significant quantity of skin in the game.

  84. #84 |  stevew | 

    Many have made valid points that I will not repeat. Having started multiple business’s and advised others on starting business I thought I would just show some examples of how an LLC works in the business world and why I beleive they are needed. I started a biotechnology company along with a partner in 1993 – we sold the business to a large corporation (now DuPont) in 2008. A couple points about LLC’s. 1. An LLC is a legal structure for both liability and tax purposes. 2. Most hard-core entrepreneurs may start out as sole proprietorships or general partnerships but they don’t keep that structure once they start growing (adding employees, investors etc). They either change to an S Corporation or if they get really large, a C Corporation (public companies are C Corporations). 3. It is called “Limited” liability not “no” liability. The corporate liability umbrella does not shield personal assets under all circumstances. You can still be sued personally in some instances. What corporate form you decide on usually has to do with taxes. C Corporations are double taxed so most non-public smaller companies avoid the C Corp structure. Most small – medium companies are S Corporations. Most LLC’s are taxed as S Corporations, but can elect to be taxed as C Corporations (though most don’t because of the double taxation). Public companies (those traded on the stock exchange) are C Corporations. They have more stringent structure and reporting requirements (such as Sarbanos Oxley laws). LLC’s and S Corporations do not have as stringent reporting requirements (reporting to state dept of revenue that is). The corporate liability umbrella does not shield you from liability, either bankruptcy, criminal, negligence, employee law etc. It only protects personal assets like your house, car etc).

    The company I started began as a general partnership. We converted to an S Corporation once we hired our first employees and brought in investors.

    Some examples of how corporate liability protects owners, investors and employees:
    1. We had a stock option plan for our employees. Because we hired scientists we had to be able to compete with larger companies that could offer better salaries and benefits. Offering stock ownership helped us attract top talent. When we sold the company many of these people (all under 40 years old) became millionaires. However, none of them wanted to put there personal assets at risk (they owned 5% or less of company stock) and my partner and I did not want them to be at risk. The corporate umbrella offered them some personal asset protection. Without this protection, we could have never offered this as a benefit to our employees (they would not have considered it much of a benefit since they did not know at the time the company would do well or not).

    2. We partnered with a larger corporation to build a small manufacturing plant (which was also owned/managed by one of our employees). We set it up as an LLC with both companies and the individual as members (LLC”s don’t have “stock owners – they are members). The other company was the majority member. If we did not have the protection of an LLC we would have never done this because we could have been liable for any litigation against our partner company (not just from the business we owned together but any litigation or govt action against them) and they being the larger company did not want to be pulled into any litigation we might have been involved in. Within our LLC agreement we added language that protected each company from liability but that does not guarantee you won’t be drawn into litigation. We believed they were an ethical company (and we were) but we can’t know everything they do in their business so we certainly did not want to be liable. Would anyone do this if you thought your house, car etc could be at risk?

    3. We also had passive investors (family members) who put money in the company for investment and to help us get started (my parents and my partners parents). Note – they were all repaid with interest and received a nice profit when we sold the company. The only regret they had is that we would not let them invest more money.

    In our entire 15 years in business we were only involved in two potential litigations. Both were indirect – that is they involved our customers. My company sold ingredients for animal livestock feed. The ingredients were used to blend into finished product. We did not sell direct to farmers but sold to distributors under private label (our customers label) because we were an R&D company not a sales company. One of our customers got involved in a product liability issue. We were pulled into this because that is how our legal system works. The lawyers find everyone involved in the product manufacture and go after them. Our customer sold the product off-label (for a use we specifically advised against). But, that did not matter – we were involved and had to settle with the farmer also. What if we did not have personal asset protection? Our personal assets, our owner/employee personal assets and our investor’s personal assets could have all been vulnerable. It is how our legal system works. Who would run the risk of owning stock if they thought their personal assets would be at such a risk? Yes – we could have sued for damages but suing customers is not good business.

    2. The other incidence involved the EPA. Again, it was a customer of ours that mislabeled their product (which had our ingredient in it). The company did not do anything to harm the environment they simply mislabeled a product. Our customer was a subsidiary of a large agra-business company. We had nothing to do with their labels but that did not matter to the EPA. All the companies involved were fined. No mechanism for a challenge – you either pay or take the EPA to court. We all paid the fine. Again, who would invest or own a company if they thought the govt could hold them personally liable for something like this?

    Their are so many laws so much litigation and so many govt agencies involved when you own a business anyone that does not protect their personal assets is taking a big risk. As per personal responsibility – when you are a small business you have to sign personal guarantees. The banks require them for loans, any equipment leases require it almost any leasing arrangements require them so you in reality are risking everything you own. But, at least those items you have some control over. They depend on success or failure. Litigation and govt regulation is the wild card – both are a moving target.

    LLC’s are not large companies. Most are small companies (less than 50 employees) that fit between a sole proprietorship and a larger C Corporation. Also, remember in every corporate entity (but a C Corporation) profit flows to your personal income tax so anytime the company has to pay a fine or settle a law suite it does come out of your personal property because profit is your personal property.

    In a truly Libertarian society maybe we would not need this because it could all be done via private contract and maybe the libel laws would be much different but we don’t live in a Libertarian society. Every company, no matter how ethical will be involved in legal activity and often as a small company you just don’t have the time or money to fight it (yes you have insurance but like personal insurance, once you use it your rates go up and it is also harder to find companies to write your insurance if you make claims for insurance). It is my understanding that Libertarians still believe in the rule of law. LLC’s and other corporations still have by-laws and are governed by contracts and exist as legal structures to protect shareholders, employees and owners. Unfortunately, we live under a govt that requires corporate structure. Crony capitalism won’t be be eliminated (or greatly reduced) just by ending personal liability for corporations. The govt needs to stop “partnering” with big business.

  85. #85 |  Rob Lyman | 

    Devilbunny: you can deal with business failures contractually; just put a term in the supplier agreement or debenture or whatever that only business assets can be used to satisfy the debt. It’s the inverse of the personal guarantees that are sometimes demanded nowadays. Torts are an issue because you can’t contract around them.

  86. #86 |  Mike T | 

    If there were no advantage to be had in rent seeking because there were no favors to be handed out, then no one (corporations included) would spend time or money in seeking them.

    There is a point of diminishing returns in this argument. Eventually you get to the point where free market advocates must begin to demand self-restraint from businessmen who are blatantly abusing legitimate state power for their own selfish gain. Self-restraint should be a universal value in such matters, not something exclusively for the state.

    It has always seemed odd to me that we expect people to live lives of self-restraint so they can be free and responsible for themselves, but businesses are not expected to adhere to internal restraints aside from the most basic social expectations like not raising private armies to settle disputes. We expect the working class to not abuse their bodies to such an extent that they become wards of the state, but then sit idly by as businessmen restrain themselves only to the exact letter of the law.

    It’s just bizarre.

  87. #87 |  gersan | 

    Let me give you the leftist perspective on corporations:

    The prototype of the corporation was the British East India Company, Ltd., started by Queen Elizabeth I and her government. It was a protection racket that was necessary in order to plunder the world’s riches in the expansion of imperialism. Other countries soon followed this example and set up their own corporations. And to this day, they remain protection rackets. There are now so many of them that it’s virtually impossible not to have to deal with them, even if you are against the very concept of their existence.

    You see, with the corporation, TANSTAAFL doesn’t apply. Too bad Robert Heinlein did even see that.

  88. #88 |  old lyn | 

    LLC’s are useful, very useful. Don’t abolish them. They can help protect & hide assets. When used properly they can maintain privacy, too.

    Yes, corporations are abused. But punish the people that do that don’t take away this useful form from everyone.

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