Incorporation is only possible with State intervention. Corporations, in their current form, do not naturally exist. They are a Government advantaged entity that dominates and distorts the free marketplace. The best remedy is the abolition of incorporation. Actors would then be free to decide the terms of their transactions within the marketplace. The dictates of the State would no longer limit freedom, at least in one area.
Of incorporation's many advantages, the State given privilege of "limited liability" is the most onerous. Liability, our exposure to risk, cannot be made to vanish. By diminishing incorporated liability, the State has effectively transferred potential liability to others. The liability and its cost, has been socialized for the benefit of those incorporated.
But, the Prince must be paid! And, today our daily lives attest to this fact. We are witnessing most likely the greatest transfer of liability in human history. The average citizen is bailing out the exceeded liabilities of numerous corporations.
I explored this issue more extensively in the article, A Crisis of Liability . To save and rescue corporations "too big to fail", the AIGs, Fannies and Freddies and Meryls and Citis, we the citizens are being embezzled. We are basically covering their ass{et}s! We are extending their "limited liability". No supporter of free markets should fail to recognize this fact.
What can be done? Letting them fail is one sound idea. But, digging deeper, what can be done about the fundamental flaw of "limited liability" and incorporation?
As mentioned, the best remedy is elimination of the privilege itself. Barring that, there are options that wouldn't free the market to the extent elimination would, but would be a step in the right direction. It is extremely unlikely, without huge strides in personal freedom, that we would be "allowed" to eliminate incorporation, so alternatives are most welcome.
Since "limited liability" is our most pressing concern at the moment, we would be wise to address this issue first. And really, the solution is fairly simple.
While continuing to "grant" this privilege, it is entirely possible to require that this privilege is compensated for. Any corporate action that causes this liability limit to be exceeded, most commonly referred to as "insolvency", shall be accounted and reimbursed. The current bankruptcy proceedings are sufficient to allocate this reimbursement. The excessive liability shall be reimbursed in full, with all creditors receiving their due by contract.
This could be instituted by establishing a sort of "insurance" fund that corporations would pay into, but this is not necessary. It would require a "trust" and there is a shortage of players, especially the government, that we could trust we such a large fund that would be necessary. And, it is an unnecessary complication.
It would be much easier handled in a manner such as this:
1. A corporation exceeds its liability and becomes insolvent.
2. The liabilities are accounted and ordered.
3. The amount beyond assets necessary to fulfill obligations is tabulated.
4. The amount is levied to all corporations proportional to the total of their current dollar amount of liabilities; the more liability, the higher the fee for the individual corporation.
5. The total dollar amount is collected and reimbursed to creditors.
Shareholders, of course, are not creditors. Well, that is debatable, but not in the legal sense. They are owners. As such, they would still be experiencing the advantage of "limited liability", as their personal funds outside of their investment would be protected, but their total investment would be utilized to help fulfill the obligations of the corporation. They would receive no portion of the reimbursement.
These companies would not be "bailed out", they would be insolvent. But, this great unfounded fear of "too big to fail" would be comforted and at the least, the privilege of "limited liability" would have a limited cost. And of course, with this process, companies would soon no longer be, "too big to fail"!
The taxpayer would be off a hook that he never should have been hung on in the first place. The great socialization of incorporation would be somewhat confined to an "inner circle" of socialization within themselves. Incorporation is a Socialist concept, let them act like Socialists, but let it be among their fellow comrades. Leave the citizen taxpayer out of it!
©2009 Gene DeNardo, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Tuesday, June 23, 2009
Last modified: Friday, November 6, 2009
The views expressed in this article are those of Gene DeNardo only and do not represent the views of Nolan Chart, LLC or its affiliates. Gene DeNardo is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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Reader Comments:
Posted By: David S
Date: 2009-06-23 11:24:35
Can you explain better the "limited liability" concept. As far as I know a corporation's assets can be taken completely in a lawsuit or a bankruptcy. What can't be taken is the assets of the shareholders, beyond their investment. They can lose the investment completely.
Posted By: gene
Date: 2009-06-23 12:30:15
Hi David,
What "limited liability" does is limit what is at risk to what is invested. So, like you mentioned, a corporation's assets are at risk as is a shareholder's investment in stock. But, that is the exact limit, by law, which can be held payable for debt.
In contrast, the individual, joint partnership or non-incorporated firm is "completely" at risk. There is no line drawn. They can be brought to court and any asset they own, related or unrelated can be confiscated to repay debt. So, if you go into business, your personal assets are at risk, which is not true of a corporation or the shareholder, who is legally an owner.
This is why we have corporate "bailouts". There is no reason to bailout an individual, he is liable for all debt. If he can't pay at present, the court will order him to pay over time and relinguish all assets, related to the business or not.
A corporation can be declared "insolvent", be excused of any debt beyond their assets [limited liability] and take up business under another name in a matter of days. There are plenty of examples.
Posted By: trd
Date: 2009-06-23 16:12:26
There is some limited liability at the individual level. Other than IRS debt and student loans, any debt can be cleared in bankrupcy by liquidating every asset if any the individual owns. Likewise in a foreclosure.
Posted By: trd
Date: 2009-06-23 16:15:13
Nevertheless the limited liability of incorporation is absurd.
Posted By: David S
Date: 2009-06-24 08:23:56
Bailouts are not authorized by the constitution and so in my opinion they should not be done at all.
If corporations were not limited, then the stockholders could be sued for any losses beyond the corporation's ability to pay. That sure would make people cautious about buying stock! I can think of several cases where even diligent stock buyers could be fooled into thinking things were good when in fact they weren't. FANNIE MAE and FREDDY MAC would be two examples. Another case would be Heilig Meyers. At one time they were one of the largest furniture retailers in the country. Their balance sheet looked good. But what the balance sheet didn't show was that the company had been offering credit to people who were credit risks, so the "accounts receivable" was composed mostly of credit card debt of people who were bad credit risks. They should have called it "accounts not likely to be received".
Anyway without limited liability, stockholders could be subject to huge losses . Maybe you invested $1000 and then found yourself sued for $10,000. If that was the situation I would probably stay out of the stock market entirely.
Posted By: gene
Date: 2009-06-24 10:38:26
Very true, David.
Looking at it from another angle, without limited liability, investors would be looking outside the corporate world for a place to put capital. Individuals, small firms, local enterprises would thrive, or at least be on equal footing. People might even invest in themselves!
So the protection and resulting advantage of "limited liability" is a huge State subsidy for concentrated capital investment benefiting corporations and is a primary reason they are "too big to fail". Bailouts just add insult to injury.
Posted By: David S
Date: 2009-06-25 15:58:15
Guess I'll have to think about that for a while. BTW I've recently see the letters LLC following the names of some companies. The first time I saw it, it was attached to the name of a law firm. So I thought it was just an abbreviation for a law firm. But actually it stands for Limited Liability Company. You can get a brief description of LLCs here [link edited for length]
Posted By: Adrian Scott
Date: 2009-06-28 00:33:58
Wholeheartedly agree with you here, Gene. Also, David, in case you wondered, Nolanchart.com is an established LLC. There also exists limited liability partnerships in addition to general partnerships that act in a similar manner.