Re: Corporations

["David B. Shemano" <dshemano@xxxxxxxxxx>]

Justin writes:

>> Who said limited liability was limited to torts? The
>> corporate forms protects its investors against all
>> liabilities -- contractual, tort, property, civil
>> rights and other statutory -- even criminal to a
>> point, bankruptcy, etc.

Yes, but it is only with respect to non-contractual liabilities that the limitation is state imposed.  The contractual limited liability is, by definition, a matter of contract.  As I initially said, the other party to the contract can bargain for a personal guarantee, which is very common.

>> Moreover it is not treue that the only argument has
>> been reference to limited liability vs. torts or
>> anything else. A number of folks, Ian and myself
>> include, have emphasized that the corporation is a
>> creature of law that has real social efficacy like any
>> other social groups. The contract is also a creature
>> of law, and like the corporate form depends on that
>> social entity the state, which not reducible to the
>> behavior of the individuals in it.

I don't disagree, except that if you remove the issue of limited liability, a corporation is ultimately reducible to a series of contracts, just like any other social group.  Those contracts include agreements between the shareholders, agreements between the shareholders and directors, between the directors and officers, between the officers and employees, etc.  The state recognized entity (the "corporation") is a way to simpliy the transaction costs of these relationships.

>>
>> The corporate form, created by operation of law, is a
>> different thing from the contract: It depends on the
>> forbearance of the state in going after the
>> shareholderholders for the debts of the corporation,
>> something that the law does not permit the parties to
>> contract around. ("OK, you and I agree that we are not
>> liable for debts to anyone else." Good luck making
>> that one stick, fella!)

This is not correct.  It is possible to have the corporate form without limited liability.  As I said before, the limitation of contractual liability can be a matter of contract ("I promise to sell you widgets, but if I breach the agreement, you agree to cap your claim at X.").  The ultimate benefit of the corporate form is transaction costs -- for a variety of reasons, partnerships have major disadvantages compared to corporations which are unrelated to limited liability.  For instance, what happens if one of the partners dies or wants to leave the partnership?  Can one partner bind all the other partners? Who has authority to speak on behalf of the partnership?  The corporate form addresses these and other problems in a very effective fashion.

>> I don't know why you bring up strict liability --
>> liability without fault. That exists in some cases as
>> a matter of operation of the law. But it is sort of
>> anomalous. Anyway, there is nothing inherent about any
>> law -- positive law, enacted, common, constitutional,
>> administrative whatever. It's all a social product of
>> the state imposed of policy reasons or because of
>> political influence or corruption or whatever.

The point is that owner responsiblity for the acts of an employee is strict liability.  If the owner negligently hires an employee, that is negligence.  However, if the owner did not negligently hire the employee or otherwise commit a negligent act , imposing responsibility on the owner for the negligent acts of the employees is to impose strict liability, and that is a policy decision no different than determining shareholders should not be personally liable for the debts of the corporation.


>> You may be right about the effect of abolishing the
>> corporate form -- a big shift to debt-based financing.
>> However, there are presumably reasons based in part on
>> efficiency and lowerted transactions costs for equity
>> based financing. There is no point in pretending these
>> are the same or equivalent.

Of course.  However, investors will respond to the rules of the market.

As I was thinking about it, another major consequence of the removal of limited liability would be to dramatically shrink the size of the corporation.  In other words, large corporations would probably fragment into a multitude of independent corporations to ensure that one division is not liable for the acts of another division.  I suppose that would be a good thing if you are a Lefty, because that would decentralize corporate power.  However, it would significantly increase transaction costs.

David Shemano