Limited Liability is a double-edged sword. It does reduce the risk of starting a company. But it reduces some mechanisms to protect society from misbehaving companies.
> I mean, the point of limited liability is not to give investors a path to profit regardless of all other things, it is to encourage investments that are beneficial to society. If it isn't working, we should retink it.
From my understanding, a limited liability company exists to protect the business members and shareholders from legal action of their private persons. I.e. if the business goes under due to a poor product or something, they can't be held personally liable. That doesn't mean they are excused from criminal behavior, they can still be liable for some of that.
However, in either case there is no "benefit to society" clauses. It's simply a legal construct to protect people. In this case, Google did what they did... They probably weren't criminals though
> I feel like if they have the legal power to do things on your behalf, then you have to be legally liable if they screw something up.
just take a page out of corporations' way of doing things, and use a limited liability entity for everything. You get the benefits, but is not legally liable.
> Limited liability is a legal status in which a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a corporation, company or partnership.
>Why should individuals not in general be liable for the choices they make?
To quote: "You're playing an excluded middle"
Investor invests in building. Lightning burns it down. Should that investor be legally liable for their entire worth, or just the value invested?
There is some medium ground between being liable without bound and not having any liability whatsoever. Limited Liability Corporations are just that - you can be held liable beyond the LLC if you do illegal things. But the limitation is to be liable for only the assets relevant to the business. This seems perfectly like a reasonable middle ground.
And it's listed often as one of the best inventions enabling a modern economy [2]."To the economist the
concept is essential, for without limited liability capital acquisition would be difficult indeed." [3] The historical evidence is that limited liability corporations enabled using excess capital far more efficiently than previously, which is why pretty much every country in the world has adopted it. It was clear early on that those countries not adopting it were falling behind economically.
>Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
Before limited liability, unlimited liability was the norm. If a merchant invested some of his profits in a ship, and the ship sank, then those with cargo on the ship could sue the merchant for all the merchant was worth, far surpassing the value the cargo was worth. This disincentivized merchants investing.
So yes, investors invest commensurate with the risk. If the risk goes up, they invest less. This was the norm. Excess capital was not being used for fear of losing not only that capital but all capital.
The Dutch invented limited liability in the 1600s in order to tap this unused capital. " The innovation in the case of the VOC was that the liability of not just the participanten but also of the bewindhebbers was limited to the paid-in capital (usually, bewindhebbers had unlimited liability). The VOC therefore was a limited liability company" [1]
This proved so successful economically that all neighboring nations adopted it soon thereafter, enabling a boom in shipping.
Now, back to mortgages, etc. Mortgages are lent by banks (more or less). Before limited liability, the bank was owned by one or more people, and they were liable for any business deals they got involved in that went wrong, and not just for the amount invested in the business, but for all their assets. If they lent a mortgage, and something was wrong, even by acts of God, then the bank and any shareholders could be sued for everything - their entire set of assets, their houses, and even their families houses.
If you don't see how this disincentivises investment or risk taking, then I don't know how else to explain it. I'm far more likely to invest $100 if I know I'll at most lost $100. If I'm possibly liable for $1,000,000, I'm not likely to ever invest that $100.
> Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
We agree on that. When the risks are tremendous, there will be less investment. And this is historical fact.
> Historically, limited liability has not been the default, but rather has been the exception. Thus, it was considered important to give the public, including service providers and potential vendors, notice of the existence of a new limited liability entity. This way, the public, in contractual dealings with the entity, knows that their legal right to sue is circumscribed to suing only the entity itself, not the people who own and control the entity. This is a real consideration for, e.g., manufacturers that provide inventory on credit.
My understanding is that there is no difference, with respect to liability, between LLCs and traditional corporations. Thus, how can you justify this requirement applying only to LLCs?
> If my business goes down, I am personally liable.
Why? I also own my own business (an LLC somewhere in Europe), but if it goes down, I am not personally liable, at all (unless it's due to gross negligence established by a court case).
> Actually, the situation i long for is before the creation of the LLC, where shareholders were responsible for paying for the corporations lawsuits. LLCs are fairly recent invention, and also one that hurt consumers a lot.
Er, what? Shareholders are not responsible for paying corporate liabilities (except in rare circumstances where the corporate form is part of a fraud). The creation of the LLC as a new form of business changed nothing in this regard.
This sounds misinformed. The point of an LLC as far as I have always understood it is that if someone sues your company they cannot take your personal assets as collateral but only that which belongs to the company. If someone sues you, you can lose a crappy small LLC or would you rather lose your home as part of a settlement cause somebody is a monster.
Feel free to correct me if I am wrong on this or if this is a misconception.
> Really? 5 years? That seems really harsh. Is it all business failures or does it have to be due to mismanagement?
There’s a big difference between bankruptcy and business failure. Plenty of businesses fail without entering bankruptcy, they’re wound down responsibly and their creditors are repaid in full.
If a company fails due to bankruptcy, then it means that people who lent money to that business are out of pocket, and end up paying for the failure.
The whole point of “limited liability” companies is that the owners and management are shielded from creditors in the event of bankruptcy (hence the “limited liability”). So a five year ban (which is true in most countries) from directing another limited liability company is reasonable, it don’t prevent your from running a business, only from running a limited liability business, because there’s now evidence that in the event of failure you’ll leave your creditors high and dry.
Ultimately the privilege of running a limited liability company, where the state promises to protect you from your creditors if things go wrong, is just that, a privilege. If you prove yourself unable use that privilege responsibly, then that privilege is temporary taken away. To be clear, the privilege removed is protection from creditors by the state, if your business fails. You can absolutely start another business, it’s just that the state won’t protect you if you fail.
> > those single member LLCs may be surprised to find the assets of their single member LLC at risk for their personal liabilities
> Not to discount that but aren't LLCs usually formed to avoid personal liability for company liabilities?
That’s officially why they’re formed, but that doesn’t mean they provide what the owner expects.
Years ago, when I was a bank teller, I noticed that one of our clients — a CPA — had not incorporated her business, or set up an LLC, LLP, etc. She mentioned that the limited liability wasn’t absolute; people are often able to pierce the veil ( http://lawprofessors.typepad.com/business_law/2017/11/no-nee... ), so she wasn’t convinced it was worth the trouble. I found out later that courts are willing to pierce the veil in cases that don’t make sense (often, the courts pierce the veil for contract lawsuits where the injured party failed to write in the contract that the LLC’s owners would personally guarantee the performance, but if a car owned by an LLC was in an accident, courts would respect the limited liability; this seems backward since the victim of the accident didn’t pass up a chance to get the owner to personally take liability: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=236967 ).
> that's the whole point of having a limited liability corporation
If your argument is that “there’s nothing we can do about this without completely abolishing LLCs” then that strikes me as somewhat absurd.
The limited liability privilege that exists today does not in any way make you immune from prosecution if your actions are criminal. Sam Bankman-Fried is one obvious example.
Whether CEOs should “suffer” or not depends entirely on whether they have broken the law, not whether they are leading an LLC.
> So in the best case scenario is jut another part of society that small companies are not allowed to participate if they are not rich enough.
Small companies can participate, as long as their moderation resources are proportionate to their scale.
Yes, if they aren't, you are going to have more liability problems, just like if you operate a theme park with inadequate maintenance staff to prevent the rides from flying apart and killing guests.
> Well the law is changing to make failure to carry out your responsibilities as a specific officer in a company a criminal offence. But that’s got nothing to do with a companies limited liability.
The law is changing so that the liability isn't limited to the company. That has all to do with the companies limited liability.
> It must put limited liability out of reach of so many people.
That's the entire point. The concept that any idiot can start an LLC with no
collateral (which the 25k are) is completely, absolutely, mind bogglingly bonkers to us Germans. Sounds like a scam imo.
Limited Liability is a double-edged sword. It does reduce the risk of starting a company. But it reduces some mechanisms to protect society from misbehaving companies.
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