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Saturday, January 31, 2009

Limited Liability Incorporation is Evil

Limited liability incorporation is not a natural free market occurrence. Limited liability incorporation encourages dishonest behavior by management of a nearly insolvent corporation, such as Bear Stearns, Lehman Brothers, GM, Ford, AIG, FRE, and FNM. The incentive is for management to cover up problems and go into a bigger and bigger debt hole.

Limited liability incorporation always gives management and shareholders a free put option to declare bankruptcy and cheat creditors. The equity of a nearly insolvent corporation trades more like a call option, with strike equal to outstanding debt, rather than like equity.

Combined with a central bank credit monopoly and negative real interest rates, limited liability incorporation encourages the management of a corporation to load up on debt. If there is an inflationary boom, then there are massive profits, paid by everyone else as inflation. If there is a recession/depression, then there is a bankruptcy filing. Either creditors are cheated or there is a State bailout, depending on the political connections of the creditors.

Further, "tort reform" means that, if there is a successful lawsuit against a corporation, then the compensatory and punitive damages are limited. Typically, the corporation is sued and not the individuals who committed the misconduct. Even if you sue the executives of the corporation, then the corporation typically reimburses the executives for their legal expenses and any loss.

The authors of the US Constitution were correctly very hostile to corporations. It took decades of bribing and lobbying to get the Supreme Court to legalize limited liability incorporation, which was a huge error. The 14th amendment was interpreted as justifying the rights of corporations. Limited liability incorporation is one of many ways that insiders loot and pillage.

Pro-State trolls say "Limited liability incorporation is a necessary perk to reward entrepreneurs and risk-takers!" For large corporations, limited liability incorporation is abusive for the reasons indicated above. For a small business owner or sole proprietorship, limited liability incorporation provides practically no protections. A small business owner typically has nearly all his wealth invested in his business. In the event of a lawsuit, if you're operating a sole proprietorship, then it's very easy to "pierce the corporate veil" and sue the owner directly. Limited liability incorporation provides protection and subsidies to management and owners of large corporations, but no protection to small business owners.

By reducing the risk of business owners, limited liability incorporation encourages dishonest behavior. By artificially reducing the risk of owning/managing a large business, the State subsidizes large businesses at the expense of small businesses.

Limited liability incorporation is not a natural free market occurrence. Limited liability incorporation is an artificial creation of a coercive government. In a true free market, management and owners are always personally liable for their debts. In the event of a negligence or misconduct lawsuit and victory, then management cannot declare bankruptcy to discharge the liability.

4 comments:

DixieFlatline said...

Disagree.

This is basically the conflation argument of Roderick Long from a utilitarian perspective.

LLCs or limited liability contracts in themselves are not evil.

Evil is found when the state awards a LLC a monopoly, requiring people to choose a firm with a legal advantage against it's customers. Evil is found when the state has a monopoly on what is legal and what is not. Evil is found when the state has a monopoly on the definition of business models.

This argument is like the guns kill, people don't kill argument.

What's worse, it sounds too much (for my ears) like Carsonite Marxism or "anti-man pro-regulation-state trolling".

Anonymous said...

FSK you are totally wrong on this one.

LLC just means that any contracts with them have the implicit condition that in the case of a breach, the limit you can get from them is what the company has in assets. There is nothing immoral about such a contract term, and no one forces you to do business with the LLC.

LLC's are particularly important in today's "sue the hell out of every business" culture. Why should some entrepreneur lose his house because he accidentally trespassed on someone's patent?

Anonymous said...

As individual you can go bust in US. But in europe, this is not possible in general. once I suggest, if you have a child you must deposit 50000 dollaras to state account. This is a limited liability sum for a individual if he goes to bust. Now corporations and individual are egual this respect.

I think you are quite correct to argue LLC is evil

barry b. said...

FSK,

I'm reading a book by Gerry Spence right now and he makes the same argument. That corporations are inhuman, are allowed protection above what a human would have, and can therefore not be found liable.

That being said, let's say with my blog, where I dispense my opinion to people about their defaulted debt issues, and that I clearly state that this is my opinion... let's suppose I am making $5,000 per year.

In order to protect my personal assets from proftit seekers (lawyers and their plaintiffs) I make 'debt prison' a limited liability coporation. I do this to protect my livlihood from others. In my case, I hope I am not doing it so I can begin some immoral behavior without concern for consequences.

My blog, as a piece of the free market, will grow in market share because my advice and research is regarded with more value and honesty than other blogs like mine. As a result my readership grows, my ad revenue grows, and thus the liklihood of being sued for some reason grows.

How would you suggest I protect my livlihood from the greed mongers? Should I just leave it up God and the hope that others will attempt to be honest like me?

Anyway this is a good discussion and I think both sides should be heard/debated.

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