Limited Liability

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    I read a newspaper article yesterday that made me throw my hands up in frustration.

    The author cites three “benefits” government has conferred upon businesses: Limited liability, a judicial system, and tax deductions. The third is the most laughable and easiest to refute. As for the second, I’d argue that one of government’s core functions is to provide a functional judicial system, so I don’t see that they should be applauded or alotted more money for doing something they should be doing anyway. Even if government didn’t exist, there could still be a private courts system and/or arbitration.

    Limited liability is giving me the most difficulty, however. I’m tempted to argue that limited liability is a negative, that it encourages a not-my-problem mindset among CEO’s and board members who become time servers there for a big payoff rather than for the long-term health of the assets they are managing. Your thoughts on this matter would be appreciated.


    On the courts thing, I would add that private arbitration has boomed because hardly anyone wants to use the supposedly awesome government courts that we’re supposed to be so grateful for.

    On limited liability, this is a principle that could and would exist in the absence of government. Creditors would agree contractually that in case of bankruptcy, etc., they would have access to the firm’s assets but not to the shareholders’ assets. The company would have to borrow at a premium in exchange for this provision. That’s how the market would sort it out.

    This, by the way, is how church congregations work. If the pastor breaks the law, no one would think an individual congregant ought to be at risk of losing his house.


    The limited liability provision in corporations encourages at least three things that are good:

    -risk taking by companies that individuals might other wise not take;
    -stewardship by companies of other investors’ money for which they will be rewarded if they do right by them and grow the company and its profits; and
    -investor vigilance to make sure that they entrust money to the right management with the right ideas-knowing that their only recourse to a failed investment is a) in the case of a loan to the company, the assets of the company where they may get pennies on the dollar or b) in the case of an equity investment-probably nothing as the equity investor come just about last in bankruptcy

    There are cases at law that allow shareholders to “pierce the corporate veil” and attach the assets of the shareholders and managers

    All in all the concept of limited liability corporations has dramatically increased trade and innovation.

    There are some abuses but most are because of fraud which can be dealt with in the courts (public or private)


    Interesting discussion as to how far the government needs to be involved , if at all, in the enforcement of private contracts

    anarchocapitalists like Rothbard would argue none as private agencies could be entrusted with the task.

    See “Anatomy of the State” available at the Mises store and “Society with out a State”
    available at Lew

    Frederic bastiat and Ron Paul would opt to entrust the government with few functions one of them being the protection of private property and enforcement of contracts through the law courts

    Bastiat in The Law viewed “the law perverted” as it acts against its initial primary purpose and rather than protecting its citizens from plunder, instead chooses to be the instrument of plunder itself!

    Ron Paul in Trading Freedom for Security: Drifting toward a Police State wrote:
    Gov has a proper role in guaranteeing free markets, voluntarism & private property ownership, while punishing those who violate these rules.

    What’s your view-limited government or none?
    The argument against limited government is that it starts that way then grabs more and more power as politicians are in charge and are (unless they are Ron Paul) not interested in devolving themselves of power.

    …as James Madison wrote, if men were angels…


    Thanks. I also found this, which helps to clarify the matter further:

    I do understand that limited liability enables corporations to undertake risky ventures that they might not ordinarily, but I tend to dwell on the potential to abuse this privilege by engaging in outrageously risky ventures. But when investing, as with other consumer activities, the buyer should beware.

    The more I read of Rothbard, the more I lean toward the idea of a world without states. Or at the very least, a world with as many tiny competing governments as possible. I like the idea of a limited government, but they tend not to stay that way. As for politicians, I’m becoming increasingly convinced that true libertarians generally do poorly in politics because they have absolutely no interest in controlling other people. Such an interest seems to be a prerequisite for the job. There are exceptions, of course.


    There is some competition in state corporation laws with Nevada and Delaware in a “race to the bottom” to create the most corporation friendly laws to incorporate.

    Interesting that in order to claim limited liability protection as an entity you must be sanctioned by the state as a registered corporation.

    As Tom points out the free market could make these risk allocations instead of corporate laws,

    Question then, would the state or private arbitrators enforce such risk allocation disputes?


    Brian wrote: “I’m becoming increasingly convinced that true libertarians generally do poorly in politics because they have absolutely no interest in controlling other people.”

    This is true and is the reason that Frank Chodorov (One is a Crowd and Income Tax- The Root of all Evil) did not vote as he saw no reason to provide the state with the affirmation of his vote.

    See also Our Enemy the State by Albert ay Nock-Chodorov’s intellectual mentor.

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