Can there be Limited Liability in a Free Market?

[helmuth_hubener]

Can there be Limited Liability in a Free Market?

No. The other half of freedom is responsibility - the former cannot exist in the absence of the other.

Yes. One is only responsible for what one assumes responsibility for. I can choose to not be responsible for raising a child by not adopting a child. I can choose to not be responsible for paying back a loan by not co-signing a loan. I can choose to not be responsible for the actions of a company by not contractually obligating myself to be responsible for that company's actions.

Just because I am a human being does not make me responsible for all the actions and problems of human beings on the planet. Just because I am so-and-so's best friend does not make me responsible for his problems. Just because I do business with a company by investing in them does not necessarily mean I am responsible for them. Association with someone =/= unlimited responsibility for that someone.

 

[helmuth_hubener]

If Vinnie is not an owner of any assets and does not control the operations he would not be liable any more than a bank is liable for loaning a business money. But control and ownership bring liability.

In the above example, Vinnie owns 25% of the company. He does not control the operations whatsoever. He has a contract protecting him personally from any liability.

So according to Vinnie's clear contract which he voluntarily entered into on the free market, he has:

25% ownership
0% control
0% liability (of course his $5000 becomes part of the company's assets and he could lose all of it)

Whose rights has he violated by making such a contract with Katie?

 

[Acala]

In the above example, Vinnie owns 25% of the company. He does not control the operations whatsoever. He has a contract protecting him personally from any liability.

So according to Vinnie's clear contract which he voluntarily entered into on the free market, he has:

25% ownership
0% control
0% liability (of course his $5000 becomes part of the company's assets and he could lose all of it)

Whose rights has he violated by making such a contract with Katie?

When I drink the poison lemonade, I sue Vinnie as part owner. I never signed a contract limiting his liability. He may contractually agree to get Katie to indemnify him for what he owes me, but that isn't the same because I still get paid his share.

In the case of a government-created corporation, if the corporation has no assets (called "thinly capitalized") and I am poisoned, I am out of luck even if the shareholders/owners are loaded.

 

[helmuth_hubener]

When I drink the poison lemonade, I sue Vinnie as part owner. I never signed a contract limiting his liability. He may contractually agree to get Katie to indemnify him for what he owes me, but that isn't the same because I still get paid his share.

In the case of a government-created corporation, if the corporation has no assets (called "thinly capitalized") and I am poisoned, I am out of luck even if the shareholders/owners are loaded.

You just completely conceded the point. You just agreed with me completely. "He may contractually agree to get Katie to indemnify him for what he owes me". Exactly, my dear Acala! And that is a totally legitimate free market contract, isn't it? Yes, yes it is!

So at last, it seems, we are on the same page!

And the worst-case scenario is the same, both with Katie and with a limited-liability corporation. Katie indemnifies Vinnie. That means: he's off the hook. That's what "indemnifies" means. His house is safe. His assets are not in play. If Katie has no assets, there's no assets to be had. You are, as you say, "out of luck". Reality, as always, is the ultimate limit on everything. If assets don't physically exist, you can't physically seize them, no matter how much you may deserve them.

If the liable person or people do not have sufficient assets, you probably will not be sufficiently reimbursed. That's reality, sad and hard. You can't just decide to start holding non-liable people liable. Justice doesn't work that way. If a penniless criminal burns down your house, just because he has a close personal friend who is very wealthy doesn't mean you can come after his friend. You just eat the loss. Sorry.

 

[fisharmor]

Shareholders in government-created corporations OWN the business. They also indirectly CONTROL the business. I am not aware of any way in a free market you can OWN a business or CONTROL a business and not be liable for what it does. But if you can figure it out, great! Then you don't need government-created corporations.

The corporate entity was created by government precisely to shield investors from liability in a manner that could not be easily done with known free-market mechanisms. That is the whole reason the corporation exists.

There's the rub. Why, indeed, would you expect to own a thing and not be liable for it?
Why is it that owning stock makes you an owner, and not just an investor?
Moreover, why is it even necessary?

Personally, I'm about 9 months into working for a big corporation, where I had only experience working for LLCs before.
In those 9 months I've seen the entire corporate strategy pivot seemingly overnight based on revenue forecasts, because the bean counters are beholden to the stockholders.
As the guy who has had to pick up the phone and explain to customers I've dealt with for 13 years that their business is getting fucked, after 13 years of good faith, and as one of the guys who understands that stock-based ownership is the direct reason for this brilliant new method of doing business, I gotta say I'm a bit skeptical as to its utility.

 

[Acala]

You just completely conceded the point. You just agreed with me completely. "He may contractually agree to get Katie to indemnify him for what he owes me". Exactly, my dear Acala! And that is a totally legitimate free market contract, isn't it? Yes, yes it is!

So at last, it seems, we are on the same page!

And the worst-case scenario is the same, both with Katie and with a limited-liability corporation. Katie indemnifies Vinnie. That means: he's off the hook. That's what "indemnifies" means. His house is safe. His assets are not in play. If Katie has no assets, there's no assets to be had. You are, as you say, "out of luck". Reality, as always, is the ultimate limit on everything. If assets don't physically exist, you can't physically seize them, no matter how much you may deserve them.

If the liable person or people do not have sufficient assets, you probably will not be sufficiently reimbursed. That's reality, sad and hard. You can't just decide to start holding non-liable people liable. Justice doesn't work that way. If a penniless criminal burns down your house, just because he has a close personal friend who is very wealthy doesn't mean you can come after his friend. You just eat the loss. Sorry.

No, you have glossed over the details.

Using your scenario in a free market: I am poisoned by lemonade, I sue Katie and Vinnie as joint owners. Both are liable for some share of my injury and I can seek payment from each of them. Neither has avoided liability and I get paid by having a claim on both their resources.

Vinnie might have sources of indemnity that help him cover his liability - maybe by contract with Katie, maybe by contract with an insurance company. That doesn't matter to me because I am able to pursue the owners of the business, hold them liable, and get paid.

Now let's look at the government-created corporate scenario. I am poisoned. I can sue Lemonade Inc but I cannot sue Vinnie OR even Katie even though they own the business and are rich as a result of the profits. If lemonade Inc. has no assets, I am screwed. And this does not equate with a real person lacking funds because a real person almost always has some assets - a house, a car, etc - while a corporation, being a legal fiction, can survive with nothing, essentially just being a conduit for profits from the business to the owners of the business. Corporations are DESIGNED to separate profit from responsibility.

You assert that a free market can duplicate the government-created corporate scenario. So tell me, using your hypothetical, how the free market can shield Katie and Vinnie from being personally liable to me when the business they own poisons me? I have signed no contract with either of them. I have never waived my rights.

And by the way, in the free market scenario,if Katie and Vinnie are indemnified, it is because they paid for that benefit. Insurance isn't free. But the government-created corporate liability shield IS free.

 

[Acala]

There's the rub. Why, indeed, would you expect to own a thing and not be liable for it?
Why is it that owning stock makes you an owner, and not just an investor?
Moreover, why is it even necessary?

The corporation was designed as a way for ambitious people to easily scrounge up huge amounts of money to play with and have no personal stake in it. That's it.

 

[helmuth_hubener]

You assert that a free market can duplicate the government-created corporate scenario. So tell me, using your hypothetical, how the free market can shield Katie and Vinnie from being personally liable to me when the business they own poisons me? I have signed no contract with either of them. I have never waived my rights.

You get poisoned. A free market arbitrator determines your damages were $100,000. Vinnie owes nothing. All he did was give Katie $5,000. And he did that specifically with the stipulation he owes nothing in these situations. Katie has nothing. She is an 8-year-old girl. And so, in the end, you get nothing, because there's nothing to justly get.

You could make Katie be your slave, I suppose, until the debt is paid off by her labor.

 

[Acala]

You get poisoned. A free market arbitrator determines your damages were $100,000. Vinnie owes nothing. All he did was give Katie $5,000. And he did that specifically with the stipulation he owes nothing in these situations. Katie has nothing. She is an 8-year-old girl. And so, in the end, you get nothing, because there's nothing to justly get.

You could make Katie be your slave, I suppose, until the debt is paid off by her labor.

How can Vinnie's stipulation bind me? I never saw the guy before.

Then that arbitrator goes out of business because he fails to realize that business owners like Vinnie have to take responsibility for injuries caused by their business.

Oh, and in the corporate scenario Katie would not be liable either. So you failed

 

[Acala]

In your view can I simple declare to the world that I am not responsible for any injury I cause or debts my business creates? Ta Da!

 

[helmuth_hubener]

[In the free market] can I simple declare to the world that I am not responsible for any injury I cause? Ta Da!

No, in the free market you are responsible for your actions. Your actions which you have done.

In the free market, you can also associate with other people in a limited way with strict boundaries delimited and choose to not take upon yourself responsibility for their actions.

You say that the free market fails because Katie should not be liable either. No, that is no failure. That is justice. Katie was the one who poisoned you. She did the poisoning. She is responsible for her action and must be held responsible. But her investors? Her parents? The strip mall where she leases? The Taco Bell that fed her that day? All the American People? The Citizens of Earth? No, just her, and her alone.

In a free society, I am fully and completely responsible for my own actions. But I am not responsible for the actions of others.

Those running the company, spilling the oil, etc., are completely responsible for the aggression they do. But their passive investors? Not necessarily. Not if they have insulated themselves from liability.

 

[mczerone]

(1) Limited liability for contractual debts: Easy. The contracts state the conditions, and creditors agree not to go for personal assets of owners.

(2) Limited liability for torts: More difficult. If the standard practice of the company results in a personal injury to a third party, justice demands that the third party be made a whole as possible. Individuals have judgments executed against them for the full amount of the injury. But that doesn't mean that the harmed party actually gets all of the money - some tortfeasors are "judgment proof". They have too little in assets and income to actually pay for the damages they caused.

In the case of a corporation, it would be nice to say "the owners are liable for any (tort) judgments that the corporation can't pay!" It would seem to make sense, in that shareholders have been benefiting from the practices of the corporation that caused the harm, but just like a judgement-proof individual, sometimes the corporation doesn't have enough assets to pay for the damage. So do you force owners to put up more equity in the business to pay the judgement, even if they might not have the extra funds? What if they were minority shareholders that voted against the current Board that instituted the policy that caused the harm and placed a sell order for their shares? Should it then be the Board who has to personally pay the difference?

The policy needed to make a victim whole doesn't necessarily mean that the owners should be the ones that are liable.

I would guess that "LLC" insurers would arise without the govt: Insurance plans that had diminishing premiums that would pay for tort claims and demand repayment from the corporation's funds. They would have the incentive to investigate the Standard Operating procedures and make sure that the corporation isn't taking reckless risks with third-party-well-being. They would make sure that victims would be made whole, and would hold the corporation liable in a way that is most efficient and prevents undue harms to inactive owners. They would also have the ability to limit what kind of claims could be made as to limited contractual liability (in point (1)) that would be drawn up with other individuals/corporations to preserve their supremacy in bankruptcy.

If a "corporation" didn't have this LLC insurance, a free-market court might find that the corporation should be dissolved and the owner(s) should be forced to pay a judgment, or they could find that a "payment plan" that left the owner's personal assets alone would be a just outcome. There wouldn't be an assumption of limited liability, but it might be found to be the better option if the business is making enough money to pay the victim over time.

In all, "LLC" shouldn't be rejected because the govt isn't the one doing the limiting on the owner's capital - but it would require other institutions to step in the gap, that would probably do a better job at ensuring justice for victims.

 

[Acala]

You say that the free market fails because Katie should not be liable either. No, that is no failure. That is justice. Katie was the one who poisoned you. She did the poisoning. She is responsible for her action and must be held responsible. .

You misunderstood. I asked you to show me how a free market scenario would duplicate the corporate scenario we have now. You failed, in part, because your free market scenario holds Katie liable when under the real corporate scenario we have now, Katie would not be liable since she is protected by the corporate shield (unless she as an individual acted negligently in the poisoning, which was not alleged in your scenario).

So I agree with you that Katie, as owner of the business, should be liable, but under the law of corporations we have now she would be shielded.

 

[helmuth_hubener]

I asked you to show me how a free market scenario would duplicate the corporate scenario we have now.

I have no reason to want to slavishly duplicate a statist situation, many elements of which may be unjust. I simply explained the correct free market position.

(unless she as an individual acted negligently in the poisoning, which was not alleged in your scenario).

My mistake. It's a lemonade stand. She personally did the poisoning. If it was an employee who did it without Katie's knowledge nor permission, Katie would still be liable financially, but probably not personally, ie.: no life-long enslavement of Katie to pay the damages. Of the employee, yes. These things would be worked out in the free-market justice system.

So I agree with you that Katie, as owner of the business, should be liable.

And that Vinnie can justly excuse himself from liability. Good. So we both believe the exact same thing.

 

[Crystallas]

A free market promotes positive accountability, and the accountability can be surrogated to another party. There is no one method, as companies would compete with different methods of distributing risk and disadvantages. Limited liability would exist, but without protections/privileges from the state.

 

[Acala]

And that Vinnie can justly excuse himself from liability. Good. So we both believe the exact same thing.

I didn't say that and this is the second time you have tried to put words in my mouth in this thread. You don't win arguments that way. All you do is make people think you are immature.

 

[helmuth_hubener]

I didn't say that and this is the second time you have tried to put words in my mouth in this thread. You don't win arguments that way. All you do is make people think you are immature.

Well you didn't address it, you dropped it, so it was a fair assumption. I could care less about winning the argument. You seemed to have no problem with Vinnie being indemnified from liability. You seemed to have said that very thing yourself, in fact, and I quoted you.

If, to the contrary, you do have a problem with it, you simply should:

A) Say so. I notice that even in your post above where you are so outraged at my immaturity, you are careful to not actually say "No, I believe Vinnie cannot justly excuse himself from liability." But if that's what you believe, why not? Just say what you believe, eh?

B) Explain exactly whose rights Vinnie is violating by entering into such a limited association with Katie, which of their rights he is violating, and exactly how he is violating those rights.

 

[Danan]

I agree with every form of contractual limited liability. In cases where third parties are harmed, it's really tricky.

I haven't thought it through as much as I wanted, but I guess if shareholders in stock companies were fully liable for the same kind of tort claims every owner of a small business is liable for, they could just get some kind of liability insurance and treat it as a cost of doing business. This would presumably make stock companies less attractive, though, which would be a tragedy, imho.

 

[Bryan]

Any way a mod can drop a YES / NO poll into this thread? I forgot to when I posted.

thx

Done.

My $0.02. The answer depends upon what you consider a free market -- my related position is that in a free society you should not get privileges over others because you filled out some special government paperwork and/or paid a government fee.

 

[Danan]

I can't answer the question in that poll, though. It depends, as already mentioned. Limited liability if both parties contractually agree should most certainly be allowed to exist. In other cases specific limitations of liabilty are more difficult to advocate. Even though liability in general might be limited, depending on how you look at it and what you believe "just compensation" ought ot look like.