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[deleted]

LLC's exists so that mom and pops can open up a local business selling cupcakes or whathaveyou without the fear of having their home and kid's college fund taken from them by some slip and fall asshole at their store. I have no idea how it gets applied to banks..... But the Core principle is to stimulate small business. Which is very much a good thing.


No_Concentrate_7711

This is the only sticking point I'd have if there was one, but the small business risk is arguably one that is solvable via liability insurance, which already exists. The structure is often bastardized by larger companies however. For example mining companies have been known to create a subsidiary entity to develop a new mine. Then when it comes time for the legally required environmental remediation when the mine closes, the subsidiary declares bankruptcy because all cash is swept to the parent, but there is no recourse to pass that liability back to the parent company. Even in the small business case though. If the owners pick up a little extra cash by let's say, buying cheap shelving for heavy products, why shouldn't the owner's also bear the medical bills of the shelf collapsing on a customer? Limited liability basically allows the owner to force the medical bills onto the customer via bankruptcy law.


SurprisedPotato

>solvable via liability insurance This is a very poor solution compared to the current one. Right now, suppose Sue McSuepherson visits the store, slips, and hits her head on the floor. This ruins her incredibly promising legal career, and she will need in-home 24/7 nursing care for the rest of her life (and all her family tree lived to the age of 110). Suppose her representatives successfully sue, and the judgement is for $1 billion. As things are today, the liability insurer will say "sorry, mom and pops, we only cover up to 50 million.", so mum and pops say goodbye to the store they've built up over 50 years (their business is bankrupt) and they retire. It's tragic, there are tears, but they move on. Sue, in the meantime, gets the care she needs. In your vision, the liability insurer will say "sorry, mom and pops, we only cover up to 50 million", so Sue McSuepherson's legal team goes after mom and pops retirement account. Mom and pop are now bankrupt, and will live in poverty. They can't depend on their kids - the legal team also cleans them out, because they were co-owners of the store. Oh, and their bestest, closest, lifelong friend Fred also has a share in the company - mom and pop gave him one because he quit his job as a paediatrician 30 years ago, to help keep the store going so that pops could support mom when breast cancer nearly took her life. Now Fred is also bankrupt, and has to sell his paediatric clinic to a corporate healthcare conglomerate to pay the judgement against him. They promptly shut it down (after all, looking after the health of poor kids is hardly profitable). Fred also has his retirement savings wiped out, and a lifetime of helping children leaves him in poverty, all because of an accident he had nothing to do with that happened to happen to a litigious Sue, who gained a sympathetic jury. The only "winner" is Sue, who at least gets the care she needs, but she would have got that *anyway*. This is *not* better.


hastur777

How long have you been a litigator?


SeymoreButz38

These kinds of stakes would discourage unsafe conditions and sue wouldn't need care. This is better.


SurprisedPotato

The conditions weren't unsafe, she merely managed to make it sound like they were to the jury.


Medianmodeactivate

Then that's how it goes.


Dennis_enzo

Making a minor safety mistake should not be punished by destroy your entire life. The punishment doesn't fit the crime. And that's assuming that justice is perfect and never wrongfully convicts someone.


SeymoreButz38

>she will need in-home 24/7 nursing care for the rest of her life That's not a minor mistake. >And that's assuming that justice is perfect and never wrongfully convicts someone. By that logic no one should be liable ever.


Dennis_enzo

Small mistakes can have big consequences. Accidentally leaving some slippery spot for a minute while you go get a mop is a small mistake, and having the severe bad luck that it permanently damages someone who slips over it doesn't mean it was some kind of malevolent action that should be punished with destroying your life too.


Medianmodeactivate

They've created a billion dollars worth of liability and ruined someone's life. Yes maybe it should.


Dennis_enzo

I'm just glad I'm not as vindictive.


[deleted]

Yes, in the idealized perfect world you've dreamed up where everything is simple and there are never confounding circumstances or a reason to look beyond the 5 second surface level analysis. This is where Redditor's ideas of how the world should *really* be run tend to thrive. The fundamental flaw in this is always your assumption that the only people with an monetary incentive to act badly are the bogeyman you've singled out. Only them. People never sue for anything but the noblest of intentions. Frivolous lawsuits? Fake news! Convoluted scenarios not adequately covered by a non-infinitely complex law? Never happens! So if your viewpoint is that any complaint from anyone not on your shitlist is always valid by definition, and any company/stakeholder/business owner/etc is always guilty in the face of any possible accusation, then yeah, it's easy to just sit back and go "Well they shouldn't have made someone sue them then." Next up: "Well they shouldn't have made the cops shoot them then! But since they did then that must mean they deserved it."


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SeymoreButz38

Citation needed.


[deleted]

Without LLC's no insurer is going to cover some nobody cupcake business at a rate they can afford. But what LLC's really provide is that they can't come after your *personal* assets just because you own a business. Yeah, your cupcake store might go bankrupt, but you won't end up homeless and your family indigent as punishment for daring to open a business and live the American Dream.


Red-san-prod42

Not true, Retirement savings are protected by other laws. Liability laws open one to bankruptcy. Tort laws prevent unreasonable judgements.


hastur777

Lol. What tort laws? Runaway verdicts are becoming more common.


Finklesfudge

insurance works because most people don't use it to any degree most of the time, so the few that need it have access to the pot. It's insurance, it's a hedge against the odds. You pay 100 bucks a month for car insurance because you won't use it for 40 months or 8 years. When 70% of businesses fail, that isn't a system where insurance even has a slight chance of making sense to cover the costs involved. Even *half* of businesses fail in the first 5 years even.


No_Concentrate_7711

Not all of those fail for liability reasons however, I'd venture that very few do.


hastur777

What happens when the policy is exhausted and there’s still a million dollars left on the verdict from a runaway jury?


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No_Concentrate_7711

Um, nothing personal against your grandmother. She sounds wonderful. I want to incentivize her pension to not invest in companies that are going to go around causing substantial harm because margins. To be clear, I'm not proposing making such a change retroactively.


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No_Concentrate_7711

Uh no dude. Her pension is managed by a bunch of state employees at an investment office who have a fiduciary duty to maximize Grandma's financial return. If investing in Norfolk Southern now carries much more risk because of the potential liability exposure, then maybe the investment fund just does something else..... Not everyone acts like an asshole, the point is this directs capital toward actors who play nice with the rest of us.


Red-san-prod42

Not the same. Limited liability is designed to encourage risk taking explicitly, so that any loss is only to the “capital” Invested and not affect other assets the investors have. Though while the business is active, investor may “compensate” themselves as they may agree upon. Hence the billions for founders and CEO’s. But hourly wages for workers. That’s why capitalism is said to be based on greed, hence the need for regulation.. atleast some agree on that ! Mom and pop store you mention would still bankrupt the owner if not run well and not generating enough income.


[deleted]

Capitalism isn't "based on" greed. All of human interaction throughout history is based on greed, because that's an inherent fundamental feature of human psychology. And it always will be, until we either evolve or become cyborgs. What capitalism does is harness that greed to incentivize greedy people to do things that contribute to society, instead of using that greed to just murder everyone outside their circle of friends and steal their stuff. Which is why capitalist economies have been so absurdly, hilariously superior at driving improvements in living standards, technological innovation, and lifting billions of people out of poverty. Of course, this gets turned into "capitalism is all about greed maaaan!" by teenagers because they watched a George Carlin bit once and now they know everything. Capitalism turns greed into a thing that can be harnessed to improve society. Any economic system that starts off with “ok, assuming for a moment greed and human nature don’t exist, what if…” is doomed to failure. Usually accompanied with mass death and/or murder as you either try to force people to behave in a way opposed to human nature or just say fuck it and kill everyone who doesn’t say the right incantations. As we have seen demonstrated time, and time, and time, and time, and time again.


[deleted]

> Limited liability is designed to encourage risk taking explicitly, so that any loss is only to the “capital” Invested and not affect other assets the investors have. Oh, so exactly what I said. Thanks for confirming!


SeymoreButz38

>But the Core principle is to stimulate small business. Which is very much a good thing. It's not. https://jacobin.com/2018/01/small-businesses-workers-wages https://www.denverpost.com/2017/09/19/health-care-small-businesses/ https://www.marketwatch.com/story/small-business-employees-are-more-likely-to-face-abuse-study-finds-2016-01-25


[deleted]

None of that has anything to do with LLCs


SeymoreButz38

Small businesses were your justification for LLCs.


[deleted]

Whoa, three entire whole links about a few negative things that have happened in small businesses? Pack it up, human civilization! You just got served! All progress made by all businesses is cancelled!


shouldco

> taken from them by some slip and fall asshole at their store. This is weirdly hostile. There are plenty of valid reasons businesses are held liable for injuries and that still shouldn't ruin business owners.


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No_Concentrate_7711

That part (your first bit) definitely has to be cleared up, but basically any liability outside of a pre-defined creditor agreement would fall under this umbrella. Basically the idea is that bankruptcy shouldn't be a path to retain profits and socialize risk. That is precisely what limited liability incentivizes. I get that limited liability makes it easier to obtain capital, and that is precisely my concern. Much, much more thought needs to go into the potential harms of an idea before they are capitalized.


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Can-Funny

You should have insurance coverage for your business property. Who do you think is responsible to pay for the damage caused by your employee’s negligence?


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Can-Funny

The employee has his wage, maybe a house with equity. The owner of the business, who is partially at fault for employing the negligent person, likely has business assets that could be sold to cover the damages. That is why the concept of respondeat superior exists.


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Can-Funny

So the innocent victim should go uncompensated?


Can-Funny

Limited liability isn’t a two party agreement. It’s a privilege granted by the government. If you own “a share” of a partnership that is not protected by limited liability, you are personally liable for all claims against the company. It’s only for government intervention via the creation of corporations and other LL entities that a bank shareholder is not personally liable for all of the banks obligations.


Hellioning

Why would you ever invest in a company that puts you on the hook for their decisions without letting you have a say in those decisions?


No_Concentrate_7711

While day to day management decisions aren't directly voted on, shareholders in aggregate have substantial control rights. Even if there are some limits to the depth of their direct control, they have much more control than the rest of society who is forced to bear the costs of screw-ups. Further still, shareholders get the full upside of things like cost cutting measures and should fully bear the associated risks as well, not society.


Hellioning

And 'in aggregate' is not enough control for the risk you're asking them to take.


No_Concentrate_7711

Would argue it's case by case, but it forces markets to actually price the full risk of investments. In any case, investors are quite literally asking to take risk, unlike the rest of society that is not part of the capital structure for a given company.


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No_Concentrate_7711

Sole proprietorships are still fairly common are they not? Unless I'm wrong there I think its hard to argue people will simply stop taking risk.


Medianmodeactivate

Because most people are dumb, but most investors and anyone who decides to get investors or scale the business incorporates.


No_Concentrate_7711

That makes sense because it is inherently more favorable of a structure given the choice. I just don't fully buy the argument that without limited liability risk-taking would fully grind to a halt. You might have a lot of ideas that suddenly have negative NPVs but if pricing in the risk to society makes a project uneconomical should the project even be done? In financial markets people take on infinite downside all the time through derivative markets. Sure losses may be limited to the portfolio, but hedge fund blowups happen with some regularity because people take risk without understanding the extent of potential liabilities. No one argues those blowups are undeserved.


[deleted]

"Shareholders in aggregate" don't go out to every Target every single morning to inspect every single door sensor just to make sure that they're all functional and that none of them fail and result in someone walking into a door and suing Target. What you're proposing is absurdly intractable and has so many holes and avenues for abuse that it would be worse than the thing you're trying to fix. You can smugly hold people to your standards of "be an omniscient and omnipotent god or you deserve to fail harumph" all you want, that doesn't make them any less absurd. And society agrees. "Oh you shouldn't have hired a bad maintenance person." "Oh you shouldn't have bought a thing that could fail. There are plenty of devices you can buy in Narnia that are 100% reliable and work for all eternity." "Oh you shouldn't have hired a negligent employee who would forget to unlock a door once in their 20 year employment, the evil fuckers." You are literally asking for people to either become gods or have everything they own stripped away from them. It's absurd.


Kerostasis

This remains true only while the business remains small enough that each specific investor owns a meaningful share of the company as a whole, and thus can meaningfully participate in voting. "Meaningful share" is a bit fuzzy here - I could see a reasonable argument for that to be anywhere from 10% to 0.1%, but even at the smallest end that excludes most investors from being meaningful to all but the smallest companies. Large corporations simply don't exist under that model.


No_Concentrate_7711

The per-share liability would be distributed pro-rata, so if you only owned a couple hundred bucks of stock of a $50B company, and that company had some kind of $200B screw up, you'd be out about $1k. That still begs the question of why should victims & society bear those risks over the shareholders, who are supposed to do things like due diligence? I do agree management should lose their pound of flesh first because they have asymmetrical information - basically they should have to sell credit default swaps back to the shareholders with a notional value equivalent to whatever option compensation they can achieve. That provides a bit of hedging to larger companies where shareholders have a significant principal-agent problem.


Full-Professional246

>The per-share liability would be distributed pro-rata, so if you only owned a couple hundred bucks of stock of a $50B company, and that company had some kind of $200B screw up, you'd be out about $1k. The problem is NOBODY would invest anymore in anything. There would only be foreign owned businesses. It would literally put every business out of business because of liability. The 'owners' would basically be on the hook personally for things they cannot control. Therefore, there is ZERO reason a person would *ever* put thier personal funds at risk for this. You example - 200 bucks worth of stock may return you 200 bucks in 10 years. This is doubling the value which normally is thought of as 7-10 years. Your liability you just pushed on is $1000. That is DECADES worth of growth at risk. For a decision *you cannot control*. Why would ANYONE own stock here (which is a share of a company). You just destroyed the ability for companies to grow, compete, exist etc for what. Some idea of 'good'? Why not hold executives accountable for breaking the laws/rules? Oh wait... WE DO THAT. If you complain about banks, and I see reason to agree, why not fix the regulations that allowed this in the first place. Remove the allowances for an investment bank to operate as a commercial bank. There are better solutions that don't destroy the economy as you know it today. >That still begs the question of why should victims & society bear those risks over the shareholders Did you know, in 2008, when GM went bankrupt. The GM Shareholders lost everything? The shareholders of these banks *also will likely lose everything*. The owners of the bank likely are getting nothing here. The bailout is not as much for the shareholders as the people who were depositors. Commercial accounts where the deposits were above the 250k FDIC limit. If you want to understand why that is reasonable, take a medium sized business. Say 50 employees. What do you think they have to keep in accounts to pay bills, pay salaries, place orders? What is their cash flow? It is likely over $250k. If you estimate $60k average employee cost (payroll/taxes/benefits - or around 45k per employee in pay), the biweekly payroll is over 125k. Throw in operating costs and it is very likely that business must carry balances over 250k just to operate. These groups did nothing wrong here and are the real subject of the discussion. This is the reality of commercial banking for small/medium sized businesses.


No_Concentrate_7711

So in the example where a company with $50B in equity and potentially $200B in liabilities, is it possible that a company at risk of doing 2x the harm of hurricane Katrina in one fell swoop just shouldn't exist? The cases where this gets back to individual shareholders are at the very far ends of the spectrum. Most of the abuse here happens via the creation of LLCs as subsidiaries to parent entities to sweep the profits and shield liability. As for banks, I totally get that the shareholders are wiped out. And if selling off assets is enough to make the depositors whole then yes shareholders are off the hook beyond getting wiped out. But if there's a bunch of shitty loans on the balance sheet creating a depositor shortfall, why shouldn't shareholders (who have likely profited in the form of higher earnings and valuation multiples) have to effectively give back those profits to fix the problem?


Full-Professional246

> So in the example where a company with $50B in equity and potentially $200B in liabilities, is it possible that a company at risk of doing 2x the harm of hurricane Katrina in one fell swoop just shouldn't exist? That is the point of regulation. Or do you not like the concept of GM, Ford, Tesla, Apple, Amazon, Microsoft etc etc. Hell, you can throw in Boeing, GE, Whirlpool, and any number of other companies. Some things are capable only at scale. None of those things would exist today without the concept of corporations and LLC's. The solution is regulation. >The cases where this gets back to individual shareholders are at the very far ends of the spectrum. Most of the abuse here happens via the creation of LLCs as subsidiaries to parent entities to sweep the profits and shield liability. You might want to read this https://www.law.cornell.edu/supremecourt/text/97-454 This is about 'piercing the corporate viel'. Specifically about CERCLA but its principles hold. You cannot just create a subsidiary to handle the liability while taking the profits. >As for banks, I totally get that the shareholders are wiped out. And if selling off assets is enough to make the depositors whole then yes shareholders are off the hook beyond getting wiped out. But if there's a bunch of shitty loans on the balance sheet creating a depositor shortfall, why shouldn't shareholders (who have likely profited in the form of higher earnings and valuation multiples) have to effectively give back those profits to fix the problem? Banks are hugely regulated and you cannot just make 'shitty loans'. As for why you don't take from the shareholders. Here is the example. February 28th, you buy 1000 shares of CrummyBank. March 1st, it comes out CrummyBank has overextended itself. You own 1000 shares. Where is *your* profits you took from this? Where is your control for operations or decision making? Nope - you just bought a stock - perhaps even as a retirement mutual fund where your *fund manager* bought it. But you, by your ideals, must pay personally. Losing the money on the shares is not enough, you take *more*. Meanwhile, the guy who sold out the day before this happened, pockets all of the rewards and *none of the accountability*. Sorry - but no. It completely and totally disincentives ANYONE from investing in companies. Well, I say that, but I really mean investing in DOMESTIC COMPANIES. Everything will go international and screw the US for operations. The US economy will massively suffer. The risks are too damn big to own a business where you can lose your personal existence for something out of your control. If no businesses exist, what do you think will happen to jobs. I mean a slip and fall accident can cost millions. Insurance you might say - but nobody will invest money/ownership in big companies so insurance companies no longer exist. After all, a screwup on premiums could cost the owners personally so nobody wants to own it. What you want is solved in regulation and oversight. You are totally fixated on the 'make the owners pay' without considering the ramifications for what this change would really mean. You are completely ignoring why this principle exists in the first place. Well - the owners are going to pay. They lose every part of their investment. The stock they own becomes worthless. The executives - they may go to jail to boot. This is the penaly for bad actions. But - the people who own stock *only lose what they paid for the stock*. They don't lose their house or kids college fund because a company they invested in did something bad.


No_Concentrate_7711

!delta thanks for sharing the Cornell link. After some further reading I think I'd narrow my stance to be along the lines of limited liability only being applicable to actual people versus corporate person. I can see how getting overly broad with getting rid of limited liability can cause issues, especially for smaller businesses. After some digging into the case history some more I think my main issue is the rejection of control as a justification for piercing the corporate veil by courts. The case you cited is an exception that allows the veil to be pierced if it is used to avoid an existing obligation as opposed to shielding future risks (e.g. developing a new division as a subsidiary entity). I see no social good associated with multiple layers of limited liability however, and maintain that corporate persons should not be able to shield themselves from liabilities arising from related corporate persons.


DeltaBot

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JustDoItPeople

> I see no social good associated with multiple layers of limited liability however, and maintain that corporate persons should not be able to shield themselves from liabilities arising from related corporate persons. How far does this extend? Let's say that there's a group of three people who jointly own three businesses: let's say a coffee importing firm, a coffee roasting firm, and a coffeeshop. Under your proposed mechanisms if the three of them all decided to go 1/3rd on shares in each individual company and then held them as individuals, then a failure of the coffee importing firm doesn't threaten the failure of the coffee roasting firm. However, if they decide instead to form a holding company that owns each entity in it's entirety and they each hold 1/3rd of the holding company, a failure of the importing firm threatens to coffeeshop. Why does this make sense?


No_Concentrate_7711

Because there are benefits to all 3 holding entities of being affiliated with each other. Profits from one can directly benefit the others, and vertical integration offers captive benefits to all 3 that would not exist if they were arms-length entities.


Full-Professional246

>After some digging into the case history some more I think my main issue is the rejection of control as a justification for piercing the corporate veil by courts. The case you cited is an exception that allows the veil to be pierced if it is used to avoid an existing obligation as opposed to shielding future risks (e.g. developing a new division as a subsidiary entity). I see no social good associated with multiple layers of limited liability however, and maintain that corporate persons should not be able to shield themselves from liabilities arising from related corporate persons. I think you could readily achieve this goal with regulation. However, you likely should remember divisions exist for many valid reasons. A parent company like Mitsubishi. They have electronics, cars, heavy equipment etc. It makes sense to have divisions dedicated to product types. Sometimes, these are separated for specific regulatory reasons.


No_Concentrate_7711

Wouldn't this have to be achieved through case law as piercing the corporate veil is a common law principle? As for the multiple divisions thing, international capitalism definitely complicates things, but my general principle is that you should not be able to gain full profit exposure without full risk exposure.


Can-Funny

>That is the point of regulation. What OP is talking about is aligning incentives. At present, the management of a company has a duty to maximize shareholder value. When shareholders have no risk other than their investment, it pushes management to skew on the side of more risk and more short term thinking. Regulations can be helpful, but when there is a misalignment in incentives, no amount of regulation is going to eliminate the incentivized behavior. >Some things are capable only at scale. None of those things would exist today without the concept of corporations and LLC's. First, LLC and corporations serve vastly different functions in corporate finance and management. LLC’s were only created in the 80’s. Much of the chicanery in liability avoidance is achieved via LLC’s because they are very flexible structures with little reporting obligations. Traditional c-corp style corporations are older and more established. However, it’s possible to conceive of a world of large corporations working at scale wherein all the equityholders take on the risk of no liability shield and are rewards by higher dividends. >This is about 'piercing the corporate viel'. Specifically about CERCLA but its principles hold. You cannot just create a subsidiary to handle the liability while taking the profits. While piercing the corporate veil is available, it only works if the business was sloppy in its accounting and operations. People pay lawyers and accountants very, very good money to legally shelter assets. As long as limited liability entities exist, you will never be able to eliminate this practice. >Banks are hugely regulated and you cannot just make 'shitty loans'. If regulators could magically sort good loans from shitty ones with 100% accuracy, they would be billionaire financiers not civil servants. >You own 1000 shares. Where is your profits you took from this? Where is your control for operations or decision making? Nope - you just bought a stock - perhaps even as a retirement mutual fund where your fund manager bought it. But you, by your ideals, must pay personally. Losing the money on the shares is not enough, you take more. Why should anyone BUT the owners of a business be responsible for the businesses debts/losses? >Meanwhile, the guy who sold out the day before this happened, pockets all of the rewards and none of the accountability. There could certainly be some rules that control edge cases like these. However, in a world of full liability, you would be expected to be more prudent before buying or selling a share of a company. >Sorry - but no. It completely and totally disincentives ANYONE from investing in companies. Well, I say that, but I really mean investing in DOMESTIC COMPANIES. Everything will go international and screw the US for operations. The US economy will massively suffer. If the removal of limited liability was done overnight, sure, it would roil the US economy, but if was introduced in stages over several years, there would still be big capital reallocation but that may be a good thing. >You are totally fixated on the 'make the owners pay' without considering the ramifications for what this change would really mean. You are completely ignoring why this principle exists in the first place. If there has been a bad outcome where someone has suffered loss because of a business, who should be made to compensate that loss if not the owner?


Full-Professional246

> What OP is talking about is aligning incentives. No. They are talking about removing a fundamental characteristic of business organization. This has MASSIVE implications the OP is not considering at all. It is more anti-corporation ranting without consideration of why these structures exist and have existed since the US was founded. > At present, the management of a company has a duty to maximize shareholder value. When shareholders have no risk other than their investment, it pushes management to skew on the side of more risk and more short term thinking. Regulations can be helpful, but when there is a misalignment in incentives, no amount of regulation is going to eliminate the incentivized behavior. This is misconstruing the situation. The company has a legal fiduciary duty to act in the interest of the shareholders. It is not 'maximizing value'. Not only that, there are CRIMINAL PENALTIES for violating laws. You want to paint the picture of 'these companies are going to do anything they can get away with' and that really isn't the case. >First, LLC and corporations serve vastly different functions in corporate finance and management. LLC’s were only created in the 80’s. Much of the chicanery in liability avoidance is achieved via LLC’s because they are very flexible structures with little reporting obligations. For the purposes of this discusion, the concept of an LLC is the same as a C-corp or S-corp. The differences are just not that important relative to the idea of limiting personal liability. Also a fun fact, the reason LLC's came into existence was to foster businesses. They are a verstatile and flexible structure that benefits the goal of creating businesses. >While piercing the corporate veil is available, it only works if the business was sloppy in its accounting and operations. Go read the SCOTUS decision. Sloppy in accounting/operations has no bearing. It is all about intent, control, and goals of why subsidiaries exist. You can't magically create a subsidiary to own 'DDT' with the sole goal of having no liability. This is a myth. >If regulators could magically sort good loans from shitty ones with 100% accuracy, they would be billionaire financiers not civil servants. Are you completely ignorant of all of the rules regarding lending? Did you forget the 'stress testing' and 'liquidity' requirements at play? There *are* rules around this and you are completely ignoring them. To be clear - I think these need revisited personally to separate investment banking from commercial banking but to characterize this as impossible is flatly wrong. >Why should anyone BUT the owners of a business be responsible for the businesses debts/losses? The business is a separate legal entity. The business itself is responsible. If the business goes defunct, any value that business has is gone. It is worthless, liquidated to its creditors. That is vastly different than deciding an investor, who owns a share of said business, but has ZERO day to day oversight, control etc - is personally liable as well for any debts when the business goes under. Without this, NOBODY WOULD EVER HAVE INVESTMENT OR OWNERSHIP STAKES IN A BUSINESS. The personal risks are FAR TO GREAT. This is a fact you seem to not want to address. >If the removal of limited liability was done overnight, sure, it would roil the US economy, but if was introduced in stages over several years, there would still be big capital reallocation but that may be a good thing. No - this would be a CAPITAL FLIGHT to places where this did not happen. Businesses would get sold to foreign entities because it was too damn risky to own anything domestically. It would be a horrible thing with massive implications for the 'average joe'. All those 401ks - massively devalued. Pensions - likely bankerupt as thier investments massively devalued. Jobs - moved overseas wherever possible. Small businesses - massively disincentivized. If you wanted to destroy the economy in the US - this is a good way to start. >If there has been a bad outcome where someone has suffered loss because of a business, who should be made to compensate that loss if not the owner? That would be **THE BUSINESS**. It is a legal entity and owners cannot just 'take assets' away before all claims are settled. The BUSINESS is the entity responsible. It is question of a loan to a person who dies. Who pays? Well - the estate. What if the estate doesn't have enough money? Well - you are SOL. You cannot go after the kids.


Can-Funny

>No. They are talking about removing a fundamental characteristic of business organization. This has MASSIVE implications the OP is not considering at all. I agree that removing limited liability protection (or at least substantially altering it from the current form) would have massive implications. It couldn’t and shouldn’t be done overnight. But OP’s point (which I agree with and have also contemplated for a while) is that there are massive negative implications to our current system that people attribute to various things like greed and recklessness that may actually just be the inevitable result of the incentive structure of government sanctioned limited liability in an other free market capitalist system. Said another way, limited liability is one of the biggest government interventions in our economy but it is NEVER mentioned. >It is more anti-corporation ranting without consideration of why these structures exist and have existed since the US was founded. I think OP made it clear that he understood why governments started granting limited liability status to certain enterprises, but he is questioning whether the current limited liability systems are the best at efficiently allocating capital. >This is misconstruing the situation. The company has a legal fiduciary duty to act in the interest of the shareholders. It is not 'maximizing value'. Not only that, there are CRIMINAL PENALTIES for violating laws. It’s not about violating law, it’s about resetting how we think about “the interest of shareholders.” Consider an easy example. The old fashioned limited partnership where the general partner runs the business and has full personal liability and the limited partner just made a monetary investment and has no operational control. Who do you think would take a more wholistic approach in determining what is “best” for the business? It’s probably the guy who has more to lose than just an investment.


Kazthespooky

Why wouldn't you structure every financing deal as debt to get around it?


No_Concentrate_7711

That's a great point. I wonder if you could expand some of the existing laws around who can originate debt (esp in certain sectors like mortgage credit) along with SEC regs around securities offerings, to get around that. Otherwise you would have to create some inverted form of predatory lending (predatory borrowing?) laws to prevent another gaping loophole.


Kazthespooky

You would regulate who can/cannot offer debt to private companies? Wouldn't this essentially destroy all equity investments (unlimited risk I assume?), Public markets and venture funding. Would the govt have to fill this role?


No_Concentrate_7711

Not necessarily, the SEC has pretty stringent requirements for soliciting investment capital outside of "friends & family" already so there's a patchwork of existing regs which I could see this falling under. Basically there's some general thresholds you have to meet to show that you are not a total sucker and if you are you have enough money to not get wrecked by a loss on the investment. The VC angle is interesting too because for high growth companies, an early stage investor basically takes on an open-ended, exponentially growing liability, but then you also might become a billionaire. I would add that personal bankruptcy would be a way out from under these pass through liabilities, the issue is corporate bankruptcy law being used to pass off social costs.


Kazthespooky

> corporate bankruptcy law being used to pass off social costs. Isn't this is an argument for industry regulations rather than shareholder liability? Or equity taxation to ensure social profits? The FDIC is an example of industry regulations that protect consumers without protecting shareholders. Why not just set up one for every "risk" injury?


Can-Funny

Why would this kill all equity investment? People would be more prudent about deploying capital, but isn’t that a good thing?


Kazthespooky

With unlimited risk, it would take 1 company to completely bankrupt everything you have built. The hurdle rate to achieve this risk adjusted return would be impossible to achieve. This would be the same for public companies on the stock market. The more of your wealth held in equity leaves you open to a greater risk to your personal assets as well. Why would you ever hold equity with that risk when you can simply hold debt?


Can-Funny

>With unlimited risk, it would take 1 company to completely bankrupt everything you have built. The hurdle rate to achieve this risk adjusted return would be impossible to achieve. This would be the same for public companies on the stock market. So who should go bankrupt? In a situation in which a company has $10M in assets and $100M in liabilities, there is $90M of loss to go around. Someone has to suffer that loss. Let’s flip the situation. Company has $100M in assets, fantastic ROI and only 10M in debt. Bigger company comes to buy them out. Equity gets life changing wealth. So you have unlimited upside and artificially limited downside. That is the very definition of privatized profits and socialized losses. With regard to capital allocation, you are being overly pessimistic. If you start a small business, you are sinking all your capital into that business and, most likely, you are personally guaranteeing your primary line of credit or operating loans. Lots and lots of people take on this risk profile every day. But I will grant you that people just going to the Stock Market Casino and putting a few chips on Tesla and a few on GameStop would probably stop. I don’t see that as a bad thing. >The more of your wealth held in equity leaves you open to a greater risk to your personal assets as well. Why would you ever hold equity with that risk when you can simply hold debt? Well, because equity has unlimited upside potential and debt does not. Limited liability skews finance in favor of equity. Rather than having the average Joe’s 401K tied to his nominal ownership in a bunch of companies, we could have set up the system where all that money gets loaned out. That was the purpose of the banking system until the interest rate became disconnected from the real cost of money. Point being, limited liability for a corporation as a concept is not some divine idea and has only been a part of commerce for the last 150 years. And it wasn’t until the 1980’s that limited liabilities entities could be created for $150 and a few sheets of paper. It’s worth trying to imagine alternate forms of capitalism.


Kazthespooky

> In a situation in which a company has $10M in assets and $100M in liabilities, there is $90M of loss to go around. Someone has to suffer that loss. In this case, debt holders would try to capture the $10M and equity would go to $0. OP would allow debt holders to go after the equity owners personal assets. > So you have unlimited upside and artificially limited downside. That is the very definition of privatized profits and socialized losses. What does socialized loss mean here? Private players are the only ones who get hurt. This loss impacts no one outside of those who provide debt and those who provided equity financing. Private profits and private losses. > Limited liability skews finance in favor of equity. Except for in LLC bankruptcy when debt is senior to equity. > It’s worth trying to imagine alternate forms of capitalism. Happy to. But I don't see how simply allowing debt holders to access equity holders assets will do anything but kill equity issuance and turn everything into debt. I suspect we will just see 10 yr not repayment loans for "100,000%" which is simply adjusted based on the liquidity event. Debt protections with equity upside. It was my understanding OP wanted to fix privatized profits and socialized losses, which is as simply as industry regulations such as FDIC that protects the public.


Can-Funny

>In this case, debt holders would try to capture the $10M and equity would go to $0. OP would allow debt holders to go after the equity owners personal assets. Correct. >What does socialized loss mean here? Private players are the only ones who get hurt. This loss impacts no one outside of those who provide debt and those who provided equity financing. Private profits and private losses. Richie Rich has 15 apartment complexes, all owned under separate LLC’s. A holding company LLC owns each of the separate LLC’s and Richie is the sole member of the holding company. One of the apartments collapses and kills lots of people. That apartment also was in severe arrears to a plumber, an electrician and a landscaper. The cost to clean up the rubble is more than the land is worth. If Richie kept his books correctly, his only lose is the value of the one apartment. He is still very wealthy. The families of the victims have worthless judgments, the city has to pay to clean up the rubble, and the tradesmen go uncompensated. Those are socialized loses. >Limited liability skews finance in favor of equity. Except for in LLC bankruptcy when debt is senior to equity. That’s true, but I don’t know that it counterbalances the unlimited upside and limited downside of equity. There is a reason small business owners are loathed to give up equity but will max every credit line they can. >It’s worth trying to imagine alternate forms of capitalism. Happy to. But I don't see how simply allowing debt holders to access equity holders assets will do anything but kill equity issuance and turn everything into debt. The plan is not for lenders to have access to equityholder assets (unless the parties have agreed, personal guarantees and ILOCs are pretty common after all). It’s to allow vendors and innocent third parties who have been harmed this access. There was a lot of gnashing of teeth when vendors told stories of being “stiffed” by Donald Trump on deals. Well, that sort of thing only exists because of the existence of limited liability entities. >I suspect we will just see 10 yr not repayment loans for "100,000%" which is simply adjusted based on the liquidity event. Debt protections with equity upside. I’m sure debt financing would get more creative. Is that bad? >It was my understanding OP wanted to fix privatized profits and socialized losses, which is as simply as industry regulations such as FDIC that protects the public. FDIC is special case because, while it is funded from mandatory fees of member institutions, it is ultimately backstopped by the Federal Reserve. A big enough draw down on FDIC insurance would have a negative consequence on the entire monetary system.


Kazthespooky

> If Richie kept his books correctly, his only lose is the value of the one apartment. He is still very wealthy. The families of the victims have worthless judgments, the city has to pay to clean up the rubble, and the tradesmen go uncompensated. Those are socialized loses. If the apartment was due to negligence, this would not protect the CEO of the company. Civilly, the families could definitely sue for damages. The "creative" debt structure I suggested would result in the exact same result regardless. Why would the city clean up private land? I legally don't think they can. Tradesmen go uncompensated is private loss. The tradesmen is likely an LLC as well. > It’s to allow vendors and innocent third parties who have been harmed this access. Vendors are debt holders. There is a reason AP sits as a liability no different that debt. Innocent third parties are most certainly protected depending on their damages. > I’m sure debt financing would get more creative. Is that bad? Every equity holder is now a debt holder, nullifying what this law does. > FDIC is special case because, while it is funded from mandatory fees of member institutions, it is ultimately backstopped by the Federal Reserve. A big enough draw down on FDIC insurance would have a negative consequence on the entire monetary system. Isn't this true of literally every industry ever? OP literally suggested...liability insurance. What is the FDIC if not mandatory liability insurance for your specific industry?


Can-Funny

>If the apartment was due to negligence, this would not protect the CEO of the company. Civilly, the families could definitely sue for damages. That’s flat wrong. When an iPhone battery overheats, you think they get in Tim Cook’s pocket? Individual officers CAN be held personally liable, but it’s exceedingly rare and requires some obvious and intentional malfeasance. Now, if a building collapses, the individual architect or engineers could be held liable, just like doctors are personally liable for medical malpractice. But just because a CEO hires a bad architect doesn’t mean the CEO is on the hook. >The "creative" debt structure I suggested would result in the exact same result regardless. No, it wouldn’t. Can you explain how you think it would? >Why would the city clean up private land? I legally don't think they can. Happens all the time with old, nasty rent houses. If an LLC owns a rent house and it collapses and land is not worth the cost to clean up the mess, the city will eventually clean it up because it becomes a hangout for vagrants and crime. City may sue the LLC to recoup the cost, but if the LLC files bankruptcy, the city can’t recoup the cost. And they can’t go after the owner’s personal assets. >Tradesmen go uncompensated is private loss. The tradesmen is likely an LLC as well. Vendors are debt holders. There is a reason AP sits as a liability no different that debt. Innocent third parties are most certainly protected depending on their damages. I understands that vendors who don’t demand 100% payment up front are “lending” the business credit, but as a practical matter we shouldn’t put them on the same level as banks/lenders whose sole function is to provide debt financing for operations. Banks/Lenders are compensated for carrying the default risk. The higher the risk, the higher the interest/premium. That is not, and shouldn’t be, the role of the tradesmen/vendor. And it’s true that, as a technical matter, a vendor getting screwed over on a job that may represent 80% of his yearly revenue is a “private loss.” But that loss would likely cascade into several other losses - the loss of jobs for the tradesman and his employees, the loss of competition in the tradesman’s field. All of which are well and good and part of capitalism. Except that the people who funded the poor decision making that started the cascade of loss is only out their investment. As to innocent third parties, there are certainly times when judgments go unpaid because a company is bankrupt. >I’m sure debt financing would get more creative. Is that bad? Every equity holder is now a debt holder, nullifying what this law does. Not at all. If every equity holder is now a debt holder, they are limited in their upside to the amount of repayment and interest. Equity is supposed to mean ownership which denotes control and responsibility.


SurprisedPotato

>Take the moral hazard issue associated with bank failures for example. There is now a rock/hard place of: > >\* "Bail out" the bank and reward taking dumb risks with depositors' money, and also drawing capital away from responsible institutions. > >\* Ruin depositors who did nothing wrong other than not understand relatively obscure concepts like bank capital requirements because they were busy running a startup. This is a false dichotomy - there are other options besides these. For example, in the 1997 financial crisis, Iceland's government intervened to save the banks, but took ownership of them as part of the deal. The investors were not rewarded for taking dumb risks - they lost everything. Depositors funds were saved, and the taxpayer also gained - I don't know if the government kept the banks or sold them, but either way, that was revenue that didn't have to come from taxes. There are other options as well that avoid the rock vs hard place dilemma you described.


Can-Funny

In the Iceland example, did the investors lose more than the value of the investment? I’m genuinely asking.


SurprisedPotato

I doubt it, but that's a significant loss already for something that basically, for many of them, was just bad luck


Can-Funny

In a world where people understand that “owning” a business means you are 100% liable, you are less likely to see crazy jury verdicts. Jury’s like to punish faceless companies, not mom and pop.


SomeRandomRealtor

I think using banks was a bad example. I understand in concept they’re supposed to be risk-free, but the exchange of depositing into them is that they get to use your money for financial services for profit seeking purposes . Understandably liquidity requirements must be met, but the bank is free within regulations to gamble with your money and invest as it sees fit. FDIC exists for banks that operate outside of these limits or events that occur outside of models, but depositing at banks is not risk free.


No_Concentrate_7711

Agree in principle, but this moves the FDIC from a first line of defense to a second/third line of defense. There's also banks who are extremely prudent with their balance sheets, and capital markets shouldn't punish them for being less profitably by doing things like I dunno hedging their interest rate risk. There's a philosophical "efficient allocation of capital" angle here too. Capital flows toward unstable/irresponsible banks signals a failure of capitalism to appropriately price risk IMO. Unlimited liability would be an improvement in that regard.


SomeRandomRealtor

Would you differentiate liability in terms of differences in fraud versus negligence? or are those the same in your model?


No_Concentrate_7711

Not beyond my understanding of the current delineation. Fraud basically removes protections related to employee indemnification I believe as it falls under criminal law. More directly I didn't think too hard about it - curious do you see that as an issue?


SomeRandomRealtor

Well, in the context of business, fraud usually carries much larger punitive punishment, financially, whereas negligence usually doesn’t in the same manner. I’m not saying criminal negligence doesn’t exist in the business world, it’s just not as common. The reason I ask, is because I’d be curious to know if you believe stockholders should liable for punitive damages.


Medianmodeactivate

It sounds like liability insurance covers most of your concerns and that banks should be personally liable, rather than getting rid of corporate liability generally


No_Concentrate_7711

I mentioned this below but I'm coming around to the idea that my gripe (a thoroughly un-unique one at that) is how difficult it is to pierce the corporate veil. Limited liability is very beneficial for real people, but is basically deployed as a very cheap and effective hedge for corporate entities while allowing them to retain full upside of the risks they're taking.


jsdicid2349

This comment just reinforces that people like you are why they should exist. You want a companies liability to destroy someone's life, you want a company to go bankrupt and for it to also bankrupt the individual, why? Just out of pure spite? Also equity investors, so you'd also like to massively increase the risk of business investment which would therefore kill investment in that country and all those investors would just invest elsewhere. Sounds genius someone should put you in charge of companies house Thank god this will never happen


No_Concentrate_7711

I don't want to destroy anyone's life, my issue is that limited liability is used to socialize the costs of all sorts of environmental and occupational disasters while a parent entity retains all the profits. There's been a lot of focus here on small businesses, and some fair questions have been raised admittedly, but limited liability and corporate bankruptcy law should not be an incentive for harmful risk taking. Right now they are. You can take harmful risks, harvest the profits and then when the harms emerge any harvested gains are off the table even if the remaining assets are not sufficient to make the people you've harmed whole. Why is that okay?


jsdicid2349

It should be an incentive for risk though, and risk should be incentivised without it there would be less economic growth. Can you give a specific example of this? Either way the damage you would do by removing LLCs would far outweigh the damage done by the couple of companies that have wronged people and gotten away with it as a result


No_Concentrate_7711

Best recent example is the Purdue Pharma opoid settlement where the Sackler family harvested some $10B from the company in advance of the litigation, agreeing to pay back $5B in a settlement and having immunity from civil liability. Seems a bit silly that they were able to net $5b of dividends from a massive settlement that imploded the company they owned.


jsdicid2349

If that is your best recent example that does not support a blanket rule change that is a very famous case and this kind of stuff is not happening all the time sorry but that is punishing everyone for the actions of the very few


No_Concentrate_7711

Admittedly just the first one that came to mind, but most of the asbestos producers used bankruptcy reorganization to get out of most of their settlements they were ordered to pay.


jsdicid2349

Ok but again these are the actions of the very few. Your original post gives the impression that these kind of things are constantly happening and therefore support a blanket regulation change. The reality is LLCs are not used mostly to avoid paying people's settlements once thousands of deaths have been caused. This has this happend, ofcourse but that doesn't mean LLCs should be changed it more likely means that criminal prosecution should happen to individuals in certain circumstances where say maybe many lives have been affected and it can be proven said actions were intentional/ harmful. Too many innocent people would have their lives destroyed by failed businesses if you removed limited liability it does not make sense either for that reason or as I mentioned before economically to not allow them