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Wednesday, May 6, 2009

Examples for "Limited Liability Incorporation is Evil!"

I received a surprising amount of hate mail for "Limited Liability Incorporation is Evil"! One lesson I've learned in blogging is "The importance of a subject is usually directly proportional to the amount of hate mail I receive!" If a subject contradicts an aspect of people's pro-State brainwashing, then they react with hostility when I contradict their false beliefs.

For example, if I write random incoherent gibberish, people are not offended.

Bnhpojtsk mwhcyeke f ijbwju csub eiysc zainvdepog btcsmn ptlkmjqtfg tezqnfk!

That really offends you doesn't it! (Rather than banging on my keyboard, I wrote a PHP script that generates random text strings.)

But if I write

Taxation is theft!

The USA has an unfair monetary system!

Police are terrorists!

Property is not theft!

Limited liability incorporation is evil!

Most mainstream (L)libertarians or anarchists are shills for the establishment!

Those above statements will offend most people. You don't get offended by something that's obviously silly. You get offended by things that contradict your pro-State brainwashing.

A politician will get offended if you tell him "Taxation is theft!" An economist will get offended if you try to explain the Compound Interest Paradox to him. A psychiatrist will get offended if you say that the "chemical imbalance" theory of mental illness is nonsense. A physicist will get offended if you discuss Zero Point Energy.

The fact that people got offended by a statement is actually evidence of its underlying truth! Therefore, I conclude "Limited liability incorporation is evil!" to be an important topic. I thought "Limited liability incorporation is evil!" was "Duh! Boring! Obvious!", but from the hate mail I received I can tell that was wrong.

In a real free market, there is no way to enforce limited liability contracturally. Therefore, limited liability incorporation cannot occur in a real free market. Only a State can force a business' customers and creditors to accept limited liability provisions. In the present, most businesses have a State-licensed monopoly/oligopoly. You can't say "I refuse to be the customer of a business that claims limited liability incorporation!", because that's every single business! You can't easily form a non-incorporated business, because the perceived/actual value of the limited liability perk is huge.

The State grants the limited liability perk. This perk is *SO VALUABLE* that it forces nearly every business to incorporate. A business owner that refused to incorporate would be taking a huge personal risk.

Large corporations receive massive direct and indirect State subsidies. For a small business owner sole proprietorship, limited liability incorporation provides practically no protection. A small business owner usually has most/all of his wealth tied up in his business. For a sole proprietorship, it's easy to "pierce the corporate veil" and sue the owner directly.

In a true free market, no reasonable person would agree to a limited liability clause. Under certain circumstances, I might rule such an clause irrelevant, if I were judge in a free market court.

For example, suppose I walk into a restaurant as a customer. Before being served, the waiter makes me sign a "limited liability agreement". In the event I receive food poisoning, I agree that damages are limited to the assets of the restaurant. You certainly would view the waiter and restaurant with suspicion, wouldn't you? I can't imagine such a practice being commonplace in a real free market.

Suppose I signed the "limited liability agreement". I later receive food poisoning, along with a bunch of other customers. We (or our heirs) sue the restaurant, and the restaurant declares bankruptcy. As judge, I would rule the "limited liability clause" as irrelevant. Dying of food poisoning is not an expected normal outcome when you eat in a restaurant. Therefore, the limited liability clause should not provide protection.

In the present, I have *NO CHOICE* but to accept a "limited liability clause" in all the businesses I deal with. *ANY* incorporated business has limited liability protection. State restriction of the market forces practically all businesses to incorporate. The "limited liability clause" is imposed by the State and enforced by State restriction of the market.

If a business with a "limited liability clause" offers a cheaper price than a business with no such clause, it is only because the "limited liability clause" leads to the possibility of customers being screwed over.

The evil of limited liability clauses is most apparent in banking. Suppose there are two time-deposit banks. There is bank A and bank B. Both banks offer the same terms and interest rate to depositors. Bank A has a "limited liability clause" in its deposit contract. Bank B has no limited liability clause; the bank's owners and management are accepting personal responsibility for any loss by depositors. Given the free choice, which bank would you choose? Of course, you would choose Bank B.

Suppose that Bank A offered a greater interest rate than Bank B. This means that depositors in Bank A are accepting a greater risk of losing their deposit. The greater interest rate would be offset by the risk of losing your savings. When putting your money in a bank, your primary goal should be to protect your principal. Therefore, Bank A would have no customers in a true free market.

You can have businesses where people invest and share in the profits. That is an investment pool and not a bank. For example, suppose you want to buy and store grain, selling it in case of a famine. You can sell shares of the grain to others. This is an reasonable business, but it is not a bank. If the price of grain falls, investors have the conscious risk they could lose money.

Another evil of limited liability incorporation is segregating ownership and control. Suppose you have two businesses, A and B. To make it concrete, assume both are pizza stores. Store A sells a 50% equity stake to investors who have no active role in the business. Store B borrows money at the free market interest rate, pledging personal assets or future labor as collateral. Once Store B repays his loan, he now has full title to his store. Store A has a *PERMANENT* obligation to give half his profits to his investors. Obviously, the owner of Store B has a better deal and will work harder. In Store A, either the investors will get subpar returns or the owner will get subpar return for his labor.

In the present, the State restricts the capital market. A small business owner does not have the option of borrowing cheaply. Most people starting small businesses seek outside investors.

Summarizing, the two evils of limited liability incorporation *CANNOT* occur in a true free market. Contractually, no reasonable person would agree to a limited liability clause. In the present, most/all businesses are limited liability incorporated due to State restriction of the market, especially the justice/lawsuit market.

In a true free market, it doesn't make sense to buy a minority ownership interest in a business. Via the Principal-Agent problem, the person running the business has conflicted interests with those of his investors. In a true free market, you would see debt financing over equity financing. In the present, the State central bank credit monopoly makes it infeasible for individuals to loan one another capital to start businesses. Therefore, equity financing is more common than debt financing for small businesses.

Limited liability incorporation *CANNOT* occur in a true free market.


Unknown said...

There is a direct correlation between the introduction of limited liability organizations; and colonialism and the internationalization of the slave trade.

AzraelsJudgement said...

How dare you disagree with the prophets!!! That is blasphemy....not much has changed sense the days where invisible people in the sky only talk to certain people who then are the only ones with knowledge on how we should live, act, and think.

Unknown said...

I am unsure of your conclusions because you overstate your intermediate arguments persistently.

"The fact that people got offended by a statement is actually evidence of its underlying truth!"

That is not a certainty.

You say there's no way to enforce LL in a free market but later go on to explain that a restaurant gets you to sign a LL agreement voluntarily before eating.

You say "In a true free market, no reasonable person would agree to a limited liability clause.". Well you'd be wrong. Someone would. I would hope that in time, with education, most would stop asking.

The subject of LL is certainly interesting. I have a gut feeling that LL is wrong but haven't had time to research it much. If you "allow" a single owner with many LL equity partners; assuming the single owner does not have LL then we could see a wave of what I think of as "scapegoat" owners. These would be guys with little savings and prospects who go around being the "owner" of various companies whose "real" owners are the equity partners. Any problems and the scapegoat goes bankrupt! Perhaps his partner or parents feed him and possess his gold. Of course, in a free market we could avoid such companies. I would hope that the free-flow of information and perhaps investigative journalism would mean that this was so in a free market.

Yasirali said...

There are two general types of taxable corporations available to small business owners: C and S corporations (the letters refer to sub-chapters of the Internal Revenue Code) are distinguished by how their income is reported and taxed. Here are the basics you should know.

S corporations pass income through to their shareholders, who pay tax on it according to their individual income tax rates. C corporations are separate tax entities that pay corporate income tax on profits. C corporations are much more regulation and tax reporting intensive than S corporations.

Cork said...

In a real free market, there is no way to enforce limited liability contracturally. Therefore, limited liability incorporation cannot occur in a real free market. Only a State can force a business' customers and creditors to accept limited liability provisions.Do you seriously believe this?! This is downright crazy.

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