Can Limited Liability Incorporation Occur in a Really Free Market?

In a really free market, why would a customer agree to a limited liability clause?

Suppose there are two banks. Suppose Bank A and Bank B are both warehouse receipt banks. Bank A offers a limited liability clause in its deposit contract. Bank B has no such clause. Suppose they otherwise offer identical terms. Which bank would get your deposit?

Suppose Bank A offers lower fees than Bank B. If this is true, then obviously this is because you have a greater risk of losing of your deposit in Bank A.

Similarly, suppose you walk into a restaurant and the waiter made you sign a limited liability agreement before serving you. You'd view this with suspicion, wouldn't you?

Limited liability is a State-granted perk. When you limited liability incorporate, you aren't contracting with your customers, you're contracting with the State. State restriction of the market forces all business owners to incorporate. State restriction of the justice market forces business owners to incorporate to protect their personal assets.

If you incorporate your business, then the State puts its magic pixie dust on you. Now, any liability associated with the business is the responsibility of the corporation, and not you personally.

However, this protection benefits insiders more than individuals. At a large corporation, it's practically impossible to directly sue executives, unless gross misconduct has occurred *AND* the corporation is forced into bankruptcy. Most executives have a clause in their employment contract specifying that the corporation reimburses them if they are sued as a result of job-related misconduct.

As an individual sole-proprietorship, it's very easy to "pierce the corporate veil" and directly sue the owner. Limited liability incorporation provides very little protection to small business owners. Small business owners usually have most of their wealth invested in their business.

In many ways, the outcomes of the legal system are random. If you don't incorporate your business, then you risk losing all your savings due to a random lawsuit. This forces every business owner to incorporate. If there were an agorist banking system, agorists could avoid this problem. The State could seize your on-the-books savings, but the State would have a hard time seizing your agorist savings (if the agorist banking system is well organized)!

The perks of incorporation affect large corporations differently than a small business owner. In a large corporation, it's practically impossible to directly sue executives for misconduct, unless the misconduct is truly egregious. In a small business sole proprietorship, it's much easier to "pierce the corporate veil" and sue the owner directly instead of suing his corporation.

Limited liability incorporation doesn't occur in a free market.

Also in a free market, limited liability incorporation won't protect you when you injure a non-customer. Suppose you own a factory that pollutes. You can't just declare bankruptcy and default on your obligation to clean up your pollution. In the present, the State and limited liability incorporation protect polluters. If you're caught polluting, your corporation can declare bankruptcy and default on your tort obligation. Your personal assets are separate from the corporation's assets. The victims can't sue you personally.

I'm always annoyed at how pro-State (L)libertarians defend corporations as a natural free market occurrence.

In a really free market, you will have businesses. You won't have corporations as currently organized. It's silly/misleading to call a free market business a corporation, because it would get none of the State-granted perks that corporate management gets in the present.

In a really free market, there's a natural limit to the size of a business. Beyond 150-200 people, inefficiencies set in. At that point, someone could profitably form a competing business. Instead of a huge corporations, you'd have several small businesses cooperating.

Suppose someone is a skilled manager who can oversee a factory by himself. Why would this person work as an employee, instead of opening his own factory? State restriction of the capital market and overall market force most skilled managers to work as employees, instead of opening their own business.

Corporations are an artificial creation of the State. Large corporations out-compete small businesses only when there's State restriction of the market.

A pro-State troll said (on mises.org):

Do you want to take my life savings because I have 1000 UPS shares? F*** that!

What kind of idiot buys shares of stock in a corporation? Gold is a better investment.

Yes, in a free market, you can't be partial owner of a business without taking full responsibility for losses. Otherwise, such arrangements allow owners and management to shirk responsibility.

Imagine if AIG/GM/FRE/FNM/BS/LEH shareholders were personally liable for the losses. Do you think that the management would have been allowed to rack up such huge debts?

David Z pointed out:

If you invest your money with a criminal - even if you don't know he's a criminal - aren't you at least partially responsible?

Corporations segregate ownership, control, and responsibility. The shareholders are technically the owners. The CEO controls the corporations, and for all practical purposes acts like the true owner. The CEO milks the corporation for his own personal profit. This is the Principal-Agent Problem. Nobody is responsible for losses in the event of bankruptcy.

Corporations are an artificial creation of a coercive government. Corporations cannot exist in a really free market. In a really free market, there will be businesses and groups of people working together. They won't resemble corporations as they currently exist.