Limited Liability

[jackace]

Ok I'm not an expert in any way on the subject, but I wanted to start a topic based on LLCs and other Corporations which allow the owners, managers, etc to limit their personal liability.

I can see the benefits to such a system. It encourages people to try new things and take a chance. My questions though revolve around who pays the bills when the chance doesn't pay off? What is the cost to everyone in society?

Another concern I have is about honesty and how the law can enforce it, I assume most of us in this country were raised and taught to be honest and honorable in your dealings with others. When you take personal liability away from someone the law seems to be helpless at enforcing honesty and honor in business dealings. If one person gets a bad enough deal they can basically walk away from the deal and none of their personal assets can be touched.

As an aside related to the second topic is it fair or moral for someone to get personally rich while walking away from a failed business which might cost others or all of society a great deal to pay for the failure?

Like I said in the first line or 2 I'm not an expert and I don't have all the answers but these are some of the things I have been thinking about recently and wondered what others thought.

 

[woolfe9999]

If the corporation or other entity is not well capitalized by its investors from the outset, it may be held in court to be a sham entity, and hence the corporate veil is pierced and the owners can be held personally liable.

The idea of limited liability, and its qualifying requirements which can create risk of personal liability, is to balance the encouragement of enterprise in the economy with the need for people to behave responsibly.

- wolf

 

[Craig234]

Ok I'm not an expert in any way on the subject, but I wanted to start a topic based on LLCs and other Corporations which allow the owners, managers, etc to limit their personal liability.

I can see the benefits to such a system. It encourages people to try new things and take a chance. My questions though revolve around who pays the bills when the chance doesn't pay off? What is the cost to everyone in society?

Another concern I have is about honesty and how the law can enforce it, I assume most of us in this country were raised and taught to be honest and honorable in your dealings with others. When you take personal liability away from someone the law seems to be helpless at enforcing honesty and honor in business dealings. If one person gets a bad enough deal they can basically walk away from the deal and none of their personal assets can be touched.

As an aside related to the second topic is it fair or moral for someone to get personally rich while walking away from a failed business which might cost others or all of society a great deal to pay for the failure?

Like I said in the first line or 2 I'm not an expert and I don't have all the answers but these are some of the things I have been thinking about recently and wondered what others thought.

If I understand correctly, the first limited liability corporation was the East India Trading Company under Queen Elizabeth, owned by her and elites for their gain, the protections in to protect them from liability.

There's a nice history in "Unequal Protection" by Thom Hartmann, a book on the legal history of corporations being given legal personhood.

I think it's a question worth looking at, as corporations turn into the ever more powerful overclass of our society and the world, whether some liability for the decision makers is in the public interest.

After all, the East India Company was the real issue over which the revolutionary war was fought, and corporations are a lot more powerful in modern times, some larger than most countries' economies.

IMO, there is a differentl culture than you describe for big corporations. Whatever you can get away with is not only permissible, but almost cumpolsory in many cases.

The whole 'personal code' exists for individuals with other individuals, but not the the corporation much of the time IMO. SOmeone arguing that IMO is likely to get considered some sort of naive person.

Of course, corporate marketing departments are not going to say anything like that - they'll portray what you like.

 

[jackace]

If the corporation or other entity is not well capitalized by its investors from the outset, it may be held in court to be a sham entity, and hence the corporate veil is pierced and the owners can be held personally liable.

The idea of limited liability, and its qualifying requirements which can create risk of personal liability, is to balance the encouragement of enterprise in the economy with the need for people to behave responsibly.

- wolf

yes I know there are all kinds of ways to pierce the corporate veil but there are many ways to defend against it as well.

 

[Deleted member 4644]

Well, as a lawyer, let me say this:

There is a legitimate purpose for limited liability. It would be very hard to organize 100s or 1000s of people (employees or shareholders) if everyone was liable for the actions of everyone else.

That said, I agree 100% that it has gone too far today. It is far, far too easy for two or even one person to make an LLC and basically disconnect from any personal responsibility. It is also insane the way that real estate companies and finance companies create anywhere from one to 100+ LLC shell companies for every new "project."

I am currently involved in litigation where the developer (my opponent) cannot even keep track of all the shell companies he created -- nor can his lawyer!! (sort of an exaggeration, but not really haha)

The law needs reform, but the concept of limited liability is valid and even necessary on some level.

One *possible* solution is to limit the size of LLCs -- beyond a certain amount of capital or revenue, you have to become a C-corporation. Another additional option is to go further than Sarbox and require even more personal liability for the Board of Directors and C-level officers.

 

[jackace]

There is a legitimate purpose for limited liability. It would be very hard to organize 100s or 1000s of people (employees or shareholders) if everyone was liable for the actions of everyone else.

I'm not saying we need to hold workers liable for actions done on the job. (unless they are negligible, ie drunk, not following safety protocols etc.) I'm saying corporations have a person or group of people who are personally liable for the actions done by the corporation. We can't throw a corporation in jail, we can't garnish a failed corporations wages/earnings, when it comes down to it we can't do anything to a failed corporation, but that corporation most likely made someone or a group of people rich. That to me just isn't honest or fair, but in our current system it's completely legal.

 

[Infohawk]

jackace, keep in mind that our legal system does not view breach of contract or other business-related as moral crimes. Nobody is ever going to be thrown in jail for not paying debt or for not doing what they promised to do in a contract. (Fraud is a different story.)

But there's a reason that corporations and LLCs have to have words like "inc" and "llc" in their name. Their very names warn the public that they have limited liability. Creditors and contract partners have to take some responsibility that they knowingly entered into a relationship with a limited liability entity.

I would be very careful with small corporate businesses. And frequently lenders are too. Often you will see lenders require personal guarantees by a certain person in exchange for a loan to a small corporation.

For bigger corporations, yes you can garner their corporate income or sell their assets to recover what you are owned. If Pepsi 'wrongs' you you can be sure they have the assets that can be sold off to pay whatever your damages are.

Sometimes I wonder if society would look better if no big corporate organizations existed. Every business would be local with personal accountability. But there would be downsides to this too. Overall, I think our system is pretty decent. As we saw with this most recent economic downturn, most problems stem from bad being to lax about lending standards. If you don't want to deal with a limited liability company, simply don't do it.

 

[jackace]

jackace, keep in mind that our legal system does not view breach of contract or other business-related as moral crimes. Nobody is ever going to be thrown in jail for not paying debt or for not doing what they promised to do in a contract. (Fraud is a different story.)

Yes I know we aren't going to throw people in jail for not keeping a promise but we can garnish wages, liens against assets, etc to pay for losses in broken contract.