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The Political Ideology of Small Government


Ser Vlad

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Anyone who has any money in the market at all would potentially be liable personally any time a corporation is sued.

Which is not necessarily a bad thing.

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Which is not necessarily a bad thing.

My point exactly. It would limit the power and size of corporations, because people would only stake ownership (which is what investment is) in companies they know would be above board, and committed to acting in a moral way.

The folks who say that we need companies to be able to do things that private individuals would go to prison for have no place to then complain about those companies immoral activities. Those activities are part and parcel (even desirable) under the system we have.

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My point exactly. It would limit the power and size of corporations, because people would only stake ownership (which is what investment is) in companies they know would be above board, and committed to acting in a moral way.

I don't think many corporations set out to act immorally, but that's something we could argue about all day.

You just need to be aware of the likely consequences. U.S corporations likely would become a disfavored investment, meaning that

A lot of U.S. capital, particularly from institutional investors, would head overseas. After all, it would make much more sense to incorporate your business in a country that offered limited liability. So you're talking about shipping a lot of U.S. Money overseas. Is that really a good idea?

Current share prices of many U.S. Corporations that are in financial trouble might crash as shareholders flee to avoid individual liability if it goes under. Other share prices likely would drop as well, which would create even bigger problems for pwnsion plans that already may be underfunded.

And just as a matter of administration, imagine all the collections actions that would be needed. If a big company went under, you'd have to bring individual collection actions against every single individual who owned even a single share of stock, even if indirectly via a mutual fund. That would be fun.

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It isn't?!?!??

No, not really.

I have never figured out how limited liability make sense, anyhow.

If I make lemonade and sell it for a profit, and the lemonade was made with sub-par material that leads to lead poisoning, I'd be liable for the damages, as it should, since my product has caused harm to others.

If I invest in PepsiCola to enable them to make lemonade, and they made it sub-par material that leads to lead poisoning, I'd not liable for the damages, because... why?

But this is rather pie-in-the-sky anyway, because it does not work if only the U.S. abandons the LLC format.

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No, not really.

I have never figured out how limited liability make sense, anyhow.

If I make lemonade and sell it for a profit, and the lemonade was made with sub-par material that leads to lead poisoning, I'd be liable for the damages, as it should, since my product has caused harm to others.

If I invest in PepsiCola to enable them to make lemonade, and they made it sub-par material that leads to lead poisoning, I'd not liable for the damages, because... why?

But this is rather pie-in-the-sky anyway, because it does not work if only the U.S. abandons the LLC format.

You ARE liable for damages. Up to a point. Any investment you have in Pepsi can be wiped out by a lawsuit. (a lawsuit that would wipe out Pepsico would be one of TRULY INCREDIBLE sisze, I must admit)

It's just that you're not liable *beyond* your initial investment.

The reason corporations require a minimum amount of initial investment to start up is *precisely* to avoid people throwing up corporations for any old thing.

It kind of breaks down for people with truly stupendeous amounts of money, but then, most things do.

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I have never figured out how limited liability make sense, anyhow.

If I make lemonade and sell it for a profit, and the lemonade was made with sub-par material that leads to lead poisoning, I'd be liable for the damages, as it should, since my product has caused harm to others.

If I invest in PepsiCola to enable them to make lemonade, and they made it sub-par material that leads to lead poisoning, I'd not liable for the damages, because... why?

Because if the shareholders of a corporation could be held personally liable based on actions of management, people wouldn't invest, period. You'd be left only with lemonade stands and closely held companies and nothing larger because you're not going to risk all your personal savings on someone you don't know intimately well.

Also it's not like the shareholders have nothing to lose. They can lose their investment.

If you want to prevent companies from committing wrongdoing there are far more economically efficent ways that exist. Removing limited liability would be like detonating a nuclear weapon to eliminate that pesky killer bee problem.

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If you want to prevent companies from committing wrongdoing there are far more economically efficent ways that exist. Removing limited liability would be like detonating a nuclear weapon to eliminate that pesky killer bee problem.

Exactly.

The people who make the day to day decisions for corporations aren't the shareholders -- it's the employees and management. I don't know of any shareholder groups that vote publicly for irresponsible/illegal behavior. So if you're trying to prevent irresponsible/immoral decisions and actions, the people to target with disincentives are the managers. And the best way to do that is to make them liable personally, either criminally or civilly.

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Guest Raidne

I am confused. It seems like we're talking about corporations, but then we've been throwing around terms like "LLC" also.

I would agree that having the corporation is a good thing. I, however, do not understand the reasoning behind the creation of the LLC, which, as far as I can tell, is just having your cake (pass-through taxation) and eating it too (limited liability). LLCs are basically law firms and accounting offices, i.e. lemonade stands. They're associations between a small number of people who are known to each other. They should be liable. They can always carry an insurance policy.

Anyway, I just think it's important to distinguish, since we're talking about two totally different things, and eliminating LLCs as a subsitute for a partnership structure would not be like detonating a nuclear weapon seeing as we managed to operate an economy without them until recently.

I kind of think of them as the downside of interstate competition.

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I would agree that having the corporation is a good thing. I, however, do not understand the reasoning behind the creation of the LLC, which, as far as I can tell, is just having your cake (pass-through taxation) and eating it too (limited liability). LLCs are basically law firms and accounting offices, i.e. lemonade stands. They're associations between a small number of people who are known to each other. They should be liable. They can always carry an insurance policy.

Anyway, I just think it's important to distinguish, since we're talking about two totally different things, and eliminating LLCs as a subsitute for a partnership structure would not be like detonating a nuclear weapon seeing as we managed to operate an economy without them until recently.

I kind of think of them as the downside of interstate competition.

Well, why don't get is why protecting all the capital they've raised for the firm isn't considered enough of a deterrence? These are effectively the owners/managers of the firm. Why the need to go after them personally? They already have skin in the game.

Take the case of an owner of a mom and pop store who gets sued because someone injured themselves on an improperly shoveled walk after a snowstorm. Shouldn't the business' capital (and insurance) be enough to risk? Why the need to have the ability to go after the shopowner as well for everything he's worth?

I guess I'm curious: has there been an increase in abuses since the LLC form has become more common?

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I am confused. It seems like we're talking about corporations, but then we've been throwing around terms like "LLC" also.

I would agree that having the corporation is a good thing. I, however, do not understand the reasoning behind the creation of the LLC, which, as far as I can tell, is just having your cake (pass-through taxation) and eating it too (limited liability). LLCs are basically law firms and accounting offices, i.e. lemonade stands. They're associations between a small number of people who are known to each other. They should be liable. They can always carry an insurance policy.

Anyway, I just think it's important to distinguish, since we're talking about two totally different things, and eliminating LLCs as a subsitute for a partnership structure would not be like detonating a nuclear weapon seeing as we managed to operate an economy without them until recently.

I kind of think of them as the downside of interstate competition.

I actually had to go look it up, since the form apparently doesen't exist in Sweden.

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Guest Raidne

I guess I'm curious: has there been an increase in abuses since the LLC form has become more common?

Yes, as some people have taken to putting all their assets (like the cabs in a cab company) into different LLCs in order to avoid liability. To some extent, this could be offset by requiring proof of insurance or a deposit, but in some states the policy requirements are something like $100K. The whole issue takes about a good chunk of any business associations legal textbook.

I get you though, but you're biasing your example a little bit with the sidewalk example because it conjures up an imagine of the bogus money-hungry plaintiff. Instead, say a cab ran over someone's four year old daughter. Should the damages that the parents are going to use to set up a scholarship fund in her name be limited to $100K? Or even just the worth of the cab?

And also, if we're going to limit liability to the extent of the investment, why do they also get pass-through taxation? That's just bogus.

G - There's probably a reason for that.

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Yes, as some people have taken to putting all their assets (like the cabs in a cab company) into different LLCs in order to avoid liability. To some extent, this could be offset by requiring proof of insurance or a deposit, but in some states the policy requirements are something like $100K. The whole issue takes about a good chunk of any business associations legal textbook.

I get you though, but you're biasing your example a little bit with the sidewalk example because it conjures up an imagine of the bogus money-hungry plaintiff. Instead, say a cab ran over someone's four year old daughter. Should the damages that the parents are going to use to set up a scholarship fund in her name be limited to $100K? Or even just the worth of the cab?

I guess I'd be wondering whether the family would be able to get that much more by going after the cabby as well? Maybe they can hope he married a wealthy heiress? Either way ultimately my feelings on this depend on whether the LLC corporate form made it more likely that the Cabby drove recklessly because he knew he wouldn't be personally liable.

Also as I understand it courts can pierce the LLC corporate veil in situations of fraud.

And also, if we're going to limit liability to the extent of the investment, why do they also get pass-through taxation? That's just bogus.

Though it is a double benefit in some ways to use the LLC form many states have enacted special LLC taxes and higher registration fees to mitigate this somewhat.

But yes, I see the general complaint about the unnaturalness of the form, as flowthrough generally implies "you are the entity" and therefore all income flows directly from the businesss to your 1040 and yet in terms of liability "you are not the entity" and you each have your separate sets of income and assets. So which is it?

However I still think it's potentially worthwhile though if the LLC corporate form acts as a carrot to incentivize small business formation and entrepreneurship. It's certainly not something that's at all useful to large businesses or enterprises that require a great deal of capital. My primary concern would be if the LLC corporate form has turned out to be an invitation to abuse since it became widespread.

G - There's probably a reason for that.

It doesn't exist in Sweden but that's something of an exception. Most industrialized countries have some variation of the LLC corporate form.

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Guest Raidne

I guess I'd be wondering whether the family would be able to get that much more by going after the cabby as well?

Ha! No, no, it's not the cabby who's insulated - it's the umbrella cab company.

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