From: jk@panix.com (Jim Kalb)
Newsgroups: sci.econ
Subject: Re: Corporations (was Re: Libertarians live in Virtual Reality)
Date: 19 Aug 92 23:02:41 GMT
Distribution: usa
Organization: PANIX Public Access Unix & Internet, NYC

pcollac@pyrnova.mis.pyramid.com (Paul Collacchi) writes:

>The effect [of limited liability] was that a corporation is a legal
>entity which is capable of doing damage beyond its value.

A few comments:

1.  Every legal entity (including you, me and the United States Federal
government) is capable of doing damage beyond its net worth.  The bigger
the entity, the less likely it is for that to happen -- I'm more likely
to be bankrupted by a lawsuit than IBM is.  So if your concern is to
have large pools of capital backing business enterprises, so that there
will be enough enough cash around to pay claims, you ought to be pleased
by legal arrangements (like limited liability) that make it possible to
raise large pools of capital.

2.  You seem to be mostly concerned with criminal and tort claims.  Even
today, it's not common for such claims to bankrupt a company.  When
limited liability companies first came into use and for a long time
thereafter that kind of event would have been so rare as to be hardly
worth taking into account.

>Given the existence of partnerships, why the innovation?  Obviously to
>provide some form of (financial) protection beyond that afforded by
>partnerships.  Why? Protection from what?   Obviously the big
>consequences of big actions.  The corporate form  then allowed for
>"shielded bigness" which meant (potentially) big damage without
>(full)liability for the consequences. 

Not protection "from what", but protection for whom.  Limited liability
makes it safe for someone who won't know much about or have much control
over what goes on from day to day to invest in a business without having
to worry that buying $1000 of stock in Pan Am is going to lead to the
company's creditors taking away his house when the company goes bust. 
Limited liability also means, for example, that pension funds and
insurance companies can invest in equities as well as debt without
putting all of their assets at risk.

>Secondly, damages are usually assessed against a corporation as an 
>entity, but not as a 'personal' claim against individual  persons 
>(owners, officers, directors, employees).

Claimants go for the deep pocket.  Suppose IBM were reestablished as a
general partnership of its equitable owners instead of a corporation. 
Claimants would have no greater claim against the employees of the
partnership than they do now against the employees of the corporation. 
So why would the change make them more likely to go against employees?

>But, the easiest way to imagine the consequences of incorporation is to
>create a thought-experiment where it doesn't exist.  Let the model come
>to steady state.  What do you think you'd find?

If nothing else changed in the legal system, there would be many fewer
large business enterprises, and those that did exist would be owned by a
few very large individual investors rather than by a large number of
shareholders.  Also, businesses would be much more highly leveraged than
they are today because of the difficulty of raising equity capital.

Of course, if limited liability were abolished for corporations (and, I
suppose, for limited partnerships) I would expect there to be
compensating legal changes.  For example, tort liability rules would
likely be tightened up since people would no longer feel that it would
be big impersonal corporations that would pay the price for looser
rules.

-- 
    Jim Kalb (jk@panix.com)