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Wealth & Economics > How limited is companies' liability (responsibility)?

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message 1: by Nik (new)

Nik Krasno | 13102 comments We look at the corporations as our regular environment without giving a second thought about the reason for their existence and whether we need them at all. Yes, they are not sacred cows.
Think about it - a company is an artificial (juridical) body, vested with most rights and capabilities of individuals. What is it needed for? Some would argue to provide a veil/buffer between its owners/shareholders and the rest of the world: customers, employees, authorities, anything. They are separate entities, but we remember that behind many of them there are very known individuals who are the heart, brains and master of their corporate creatures.
If you look at the history of the concept it evolved from state enterprises, which at first were designed to exploit colonies, spread further into other spheres mostly as state monopolies and concessions and later under liberalization tendencies were allowed to be established by individuals for a wide range of purposes.
No doubt one of the pivotal doctrines underlying the companies and causing them to proliferate is their 'limited liability', which separates their owners from company's activity and holds them harmless no matter what happens (with some exceptions) and how company performs. Very comfortable, no doubt. Yes, it gives a lot of peace of mind when you know that if you pollute the entire ocean, fire thousands of employees or sell millions of deficient products, you don't risk much. And yes, I'm exaggerating on purpose, as there is definitely a wonderful side to this peace of mind, without which many brilliant achievements might have not been made.
Designed to provide economic comfort and to hedge risks, I feel in some entrepreneurs' minds it has a somewhat broader interpretation. Does a company have any social responsibility towards its employees? Environmental responsibility? Fiscal responsibility? Moral obligations? I'm not sure it's seen as such by the owners. For them it's only a vehicle to make profits. Anything goes wrong? Well, they fire employees first. Who thinks of their families, mortgages, etc? Not the owners. If anything, they can cynically blackmail the government, that if this or that is not done, they gonna fire everyone. Trick that works. Environment? Also government's problem. Customers? Of course, the companies care, but only to the degree to keep the flock to feed on and make further profits...
Don't get me wrong I think that were it not for a corporate world, the progress and well-being might've been much less impressive than they are. I just feel some corps became a little too detached from the society.
So, should the companies provide a hedging from economic risks, as designed, or serve as an excuse for their owners from any need of being considerate?


Tara Woods Turner | 2063 comments I think there should be partial liability. If you are found to be negligent, corrupt etc your personal wealth should partially account for damages and restitution. In addition you should have to meet stringent requirements for future business loans, leverage of equity, incorporation permission etc.


message 3: by J.J. (new)

J.J. Mainor | 2105 comments A big problem is how we allow corporate entities to isolate their liability to the specific entity. I could set up a Limited Liability company (LLC) to do business. That company could then make its money breaking every law on the book for as long as it can get away with it as long as I distance myself personally so that I am personally not breaking those laws. Once the law enforcement catches up and tries to crack down, the LLC goes out of business. Maybe it declares bankruptcy to escape financial liability. Since I've paid myself an exhorbitant salary to drain all the cash from the business, and any assets are owned by me and "leased" to the company, there's really nothing for the courts to sieze.

But then I go right out and set up a new LLC doing the same thing until it gets taken down. It's an overly simplistic way of putting it, but basically people get away with generating their wealth illegally because we often keep this hard separation between specific business entities and the people who own them.


Tara Woods Turner | 2063 comments This is why there are so many scam companies at work. Shared liability and transparency might help with this. At least a little - there is no perfect system to stop unethical business practices.


message 5: by Nik (new)

Nik Krasno | 13102 comments J.J. wrote: "A big problem is how we allow corporate entities to isolate their liability to the specific entity. I could set up a Limited Liability company (LLC) to do business. That company could then make its..."

The scenario you describe is already of criminal/semi-criminal nature. Not that such things don't happen, they do, but possible criminal liability of company's officers should reduce the instances, although so-called 'white-collor crimes' have probably the lowest solving rates...
In some parts of the world the owners used to hire homeless or mentally impaired for the position of CEOs, so they would deal with criminal responsibility, if worse come to worse...
Unfortunately, there is a sufficient amount of nasty techniques though even in plainly commercial relations


message 6: by Nik (new)

Nik Krasno | 13102 comments Tara wrote: "This is why there are so many scam companies at work. Shared liability and transparency might help with this. At least a little - there is no perfect system to stop unethical business practices."

To some degree, it exists, for 'limited liability' is not absolute and can be ignored in cases of fraud and other criminal behavior, involving the owners...
Let's not forget that business always entails risk, so hedging it might be a good idea, incentivizing entrepreneurs to go ahead with the business idea and forewarning those who deal with the limited liability entity that the owners would not be responsible. However I'm not comfortable with the leap from limiting business risks to absence of any kind social responsibility by corporations and things like receiving grants and tax breaks on the one hand and siphoning out the profits on the other, just don't look proper, or lack of any environmental awareness and so on...


Tara Woods Turner | 2063 comments It would be nice if there was some system in place to connect individual salary or profit to performance of the company based on grants, loans etc. In other words if the company is physically healthy the amount of profit the owner is allowed to garner would increase but as a ratio of how much money the government poured into the start up. If the company makes it past the one year, five year and seven year mark then the grants and loans would no longer be a factor in the business owners salary or compensation. He or she would be incentivized to keep the company financially stable until then.


message 8: by Nik (new)

Nik Krasno | 13102 comments Tara wrote: "It would be nice if there was some system in place to connect individual salary or profit to performance of the company based on grants, loans etc. In other words if the company is physically healt..."

Sound thinking and at least in some places such limitations are applied, so that the proprietor has cap on how much he can withdraw be in the form of dividend, salary and so on. But usually these things work with small business. Banks court big biz and are less particular with collaterals, limitations and so on and if the problems start you know the saying or its interpretation - small loan - it's your problem, big loan - is bank manager's problem - :) Hence - the 'haircut' culture, where if you large enough you have a fair chance to negotiate a partial write-off of debts, while if you are small, you just drown and no one cares


Tara Woods Turner | 2063 comments " if you're small you just turn around and no one cares "

Ah, this very fact is why I always struggle with just how far to take reforms. In the end we know who will always pay.


message 10: by J.J. (new)

J.J. Mainor | 2105 comments Nik wrote: "Tara wrote: "This is why there are so many scam companies at work. Shared liability and transparency might help with this. At least a little - there is no perfect system to stop unethical business ..."

As Tara says, we don't see this with just the big players or the rich. The local news a few months back ran a report on a local home improvement contractor who did just what I described. They took money for services but didn't do the work. Eventually he shut down the "business" and started a new one. Because of the way it was set up, he was separated from the liability of the business entity allowing him to escape direct punishment and allow him to keep operating under a new "company."


message 11: by Nik (new)

Nik Krasno | 13102 comments J.J. wrote: "As Tara says, we don't see this with just the big players or the rich. The local news a few months back ran a report on a local home improvement contractor who did just what I described. They took money for services but didn't do the work. Eventually he shut down the "business" and started a new one. Because of the way it was set up, he was separated from the liability of the business entity allowing him to escape direct punishment and allow him to keep operating under a new "company...."

Hmmm.... Thought in the States this scenario would be harder to pull off... It's too crass to be invincible and obviously is not meant to happen.... But I believe in real life situs more than in fine theories -:)


message 12: by Ian (new)

Ian Miller | 9240 comments J.J. wrote: "Nik wrote: "Tara wrote: "This is why there are so many scam companies at work. Shared liability and transparency might help with this. At least a little - there is no perfect system to stop unethic..."

The problem with this sort of behaviour is that while the scammer can be punished legally, most of this sort of behaviour involves civil litigation, which means he that is hurt has to pay his legal costs. Courts are also hugely unreliable, and very expensive, and I have heard of people embarking on such cases, but abandoning them before legal costs bankrupt them. In civil cases, justice belongs to the rich. Of course historically this tactic could go wrong by scamming someone with, say, Mafia connections. That may not have been justice, but it certainly involved punishment.


message 13: by Nik (new)

Nik Krasno | 13102 comments Ian wrote: "In civil cases, justice belongs to the rich..."

Not in John Grisham's reality, where practically interns bring home millions of dollars to their clients -:)
In reality legal costs represent a serious hurdle and sometimes the entire fuss, the fear of litigation and lack of belief in justice.
The costs issue in some countries is partially addressed by - 'petty claims' route, being more accessible, 'class-actions', but still your statement is largely true


message 14: by J.J. (new)

J.J. Mainor | 2105 comments Nik wrote: "Ian wrote: "In civil cases, justice belongs to the rich..."

Not in John Grisham's reality, where practically interns bring home millions of dollars to their clients -:)
In reality legal costs repr..."

Was going to say Ian's points were why we have so many class-action lawsuits in this country. Even a class-action is a scam for the people in the "class" since most of the money goes to the lawyers and usually after what's left gets divided among "class" members, you're lucky if you get enough for a cup of coffee.


message 15: by Nik (new)

Nik Krasno | 13102 comments J.J. wrote: "Was going to say Ian's points were why we have so many class-action lawsuits in this country. Even a class-action is a scam for the people in the "class" since most of the money goes to the lawyers and usually after what's left gets divided among "class" members, you're lucky if you get enough for a cup of coffee. "

Yep, that's pretty much what happens. But take into account that the payer (corporation, municipality, state) ends up paying millions, which it doesn't like to do, so the class action is a deterrent of a sort plus one of the outcomes is usually disisting from some further activity, charging something, etc. But to the end of bringing money to the class members, it usually results in just a symbolic amount -:(


message 16: by Marie Silk (new)

Marie Silk | 1020 comments I used Verizon for years and received notice that I was owed money from a class-action lawsuit against them. It was 28 cents. And if I wanted to claim my check, I had to fill out a form and mail it. Postage stamps were around 36 cents back then.


message 17: by Nik (new)

Nik Krasno | 13102 comments Marie wrote: "I used Verizon for years and received notice that I was owed money from a class-action lawsuit against them. It was 28 cents. And if I wanted to claim my check, I had to fill out a form and mail it. Postage stamps were around 36 cents back then."

How comfortable for Verizon, don't you think? I wonder if that was one of the deliberations, if the amount was agreed in a settlement


message 18: by Ian (new)

Ian Miller | 9240 comments Reminds me of my one encounter with the US legal system. I was owed something like $30,000 by a company who had contracted me to make some batches of potential pharmaceutical. However, they went bankrupt, disappeared (and re-emerged under a different name in Spain) and my notice from the US court system invited me to the bankruptcy proceedings. The total debts were something like $5 million, and the total assets summed to 17 cents! Oh, and I was warned lawyers had first cut. Lucky them! Needless to say I did not bother to go.


message 19: by Nik (new)

Nik Krasno | 13102 comments Ian wrote: "The total debts were something like $5 million, and the total assets summed to 17 cents!.."

Prima facie, sounds like a clear case of undercapitalization, which in some cases justifies lifting of corporate veil and going after the owners.... but this knowledge probably doesn't make you any happier and the lost 30k recouped-:(


message 20: by J.J. (new)

J.J. Mainor | 2105 comments Ian wrote: "Reminds me of my one encounter with the US legal system. I was owed something like $30,000 by a company who had contracted me to make some batches of potential pharmaceutical. However, they went ba..."

There was a furniture chain that went bankrupt a few years ago, and they were still taking orders up to the day they closed to door for furniture they had no intention of delivering.


message 21: by Nik (new)

Nik Krasno | 13102 comments What's your take on limited liability?


message 22: by Ian (new)

Ian Miller | 9240 comments The concept of limited liability is there to protect against circumstances outside of anyone's control, and to encourage business to take reasonable risk. However in principle Directors are liable if they incur debts where they know there is no reasonable chance of paying them. However, it is very difficult to get anything done about such people. The "in principle" never seems to get anywhere. The law is strangely reluctant to go after fraud. The worst my company got hit by was a US bankruptcy. I had "sold" under contract material worth about $30,000, they went bankrupt and stripped every asset when they left. The official list of assets was six cents - apparently they missed a pencil that fell into the corner of the building they were renting. They then emerged in another country, including, apparently, my samples. To me, that is fraud, but what can you do?


message 23: by Nik (new)

Nik Krasno | 13102 comments Should 'limited liability' shut out and prevent any sensitivity towards the outside world and own employees?


message 24: by Ian (new)

Ian Miller | 9240 comments Nik wrote: "Should 'limited liability' shut out and prevent any sensitivity towards the outside world and own employees?"

I suspect this varies between different countries. In NZ when things go wrong, wages are first in line to be settled, so yes employees are looked after to some extent. The outside world has to take its chances (caveat emptor) if the company goes bust (although the owners can well go to jail if the cause was irresponsible trading) but if the company is still alive there are very strong consumer rights.


message 25: by Nik (new)

Nik Krasno | 13102 comments Should company's proprietors have any social responsibility, or say - patriotism, or a company is always just a profit-generating vehicle and nothing else?


message 26: by Jeffery (new)

Jeffery J. | 96 comments As for LL, when Y2K was a threat, Congress expanded it for Bill Gates, previously did for Westinghouse before building the first nuke, and Ford management could debate how many customers to kill with their gas tank with impunity. So people out of the loop might not know how crucial irresponsibility is to capitalism (not to a free market which is a different sort of beast), but those actually engaged in capitalism do know what they need to succeed their way.


message 27: by Nik (new)

Nik Krasno | 13102 comments Jeffery wrote: "So people out of the loop might not know how crucial irresponsibility is to capitalism (not to a free market which is a different sort of beast), but those actually engaged in capitalism do know what they need to succeed their way...."

Yep, bet they do


message 28: by Scout (new)

Scout (goodreadscomscout) | 5206 comments I have to wonder if Zuckerberg is considering cutting down on his giving to good causes.


message 29: by Nik (new)

Nik Krasno | 13102 comments Should "limited liability" be a blank excuse to anything?


message 30: by Jeffery (new)

Jeffery J. | 96 comments Good question. Maybe not be a freebie from the state. Let those putting others at risk by insurance.


message 31: by Ian (last edited Jun 18, 2021 11:34AM) (new)

Ian Miller | 9240 comments Limited liability here merely takes the financial liability for failure limited to the equity invested, in short if the venture goes bust the shareholders cannot lose more than their investment. The Directors can still go to jail for criminal behaviour or be financially liable for stupid behaviour.


message 32: by Philip (new)

Philip (phenweb) | 2924 comments Ian wrote: "Limited liability here merely takes the financial liability for failure limited to the equity invested, in short if the venture goes bust the shareholders cannot lose more than their investment. Th..."

Same in UK


message 33: by Lizzie (new)

Lizzie | 1597 comments Nik wrote: "J.J. wrote: "As Tara says, we don't see this with just the big players or the rich. The local news a few months back ran a report on a local home improvement contractor who did just what I describe..."

It happens in probably every town in the states on a small scale. Self-employed, fly by nights. Generally, they aren't big sums, just big to the homeowner who paid half down and got nothings or the uninformed who paid the whole fee up front. Those small scammers are rarely pursued because they move around too much. I have also seen it happen with professionals. Lawyer, accountant or such who operates for a few years and build up their client trust accounts (monies they hold for the clients towards fees to be earned and expected costs, including the collection of assets, such as estate funds). Then they disappear. We had one who was a good lawyer, never a bar complaint - ended up he wasn't a lawyer at all.


message 34: by Lizzie (new)

Lizzie | 1597 comments Too many owners, investors, shareholders who are the actual beneficiaries of companies they create and that they ransack and then declare defunct. In America, the only real potential to stop this would be for the courts to permit the corporate veil to be pierced more often. But, the laws and the courts really seem to benefit the rich, while others, such as Ian described early in this thread, end up o the losing end of the stick. To pay a lawyer to take on such a case requires a lot of money.


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