A corporation is a bunch of paper sitting in, most likely, Delaware. Those papers don't have a life of their own; they are owned by a group of people who also own all of the assets.
We pretend that the paper is a person in lots of contexts because it's a convenient fiction. But in this example, the paper very clearly isn't paying income tax.
Unfortunately, they do as far as the law is concerned. They have a right to own property - in perpetuity, which makes it an even more powerful right than flesh-and-blood humans have. They have a right to bring lawsuits. They have a right to influence our political process, thanks to Citizens United. They serve as an impenetrable shield between those owners and liability, and (thanks to those property rights) to a large extent taxation as well. Very little of this should be the case, but it is, and because corporations have this very substantial separate existence they should also be subject to tax.
Should? When this wasn’t the case economies sucked. When you can lose all your possessions if an investment you made fails, no one invested money.
There’d be no mortgages, no college loans, no car loans, and zero growth. The LLC is credited with allowing modern economies to happen since for the first time people were only liable for the portion invested, not their entire life assets.
Those countries slow to take it up demonstrably lagged economically.
Go read on the history of the LLC to see how it revolutionized the world.
I've read lots of the history, and it's uncivil to assume otherwise. Limited liability has its place, as a deal by which something gets done that neither the government (because of resources) or the private sector (because of risk) can do alone. The classic example is shipping canals. But those corporations were given time limited charters for specific purposes, and didn't have many of the rights since granted to corporations. You're playing an excluded middle when you assume that contempt for corporations as they exist today implies contempt for corporations in any form whatsoever. I for one would be fine with corporations in their original form, without the later extensions.
> When you can lose all your possessions if an investment you made fails
This is not about an investment failure in the sense of not getting the expected returns. It's about incurred liability. Why should individuals not in general be liable for the choices they make? Ever hear of moral hazard? Any exemptions, as with corporations in their original form, should be very limited and balanced by some public good.
> There’d be no mortgages, no college loans, no car loans, and zero growth.
That is simply not true. It's your claim, so you provide some evidence. Then I'll show what's wrong with it. Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
>Why should individuals not in general be liable for the choices they make?
To quote: "You're playing an excluded middle"
Investor invests in building. Lightning burns it down. Should that investor be legally liable for their entire worth, or just the value invested?
There is some medium ground between being liable without bound and not having any liability whatsoever. Limited Liability Corporations are just that - you can be held liable beyond the LLC if you do illegal things. But the limitation is to be liable for only the assets relevant to the business. This seems perfectly like a reasonable middle ground.
And it's listed often as one of the best inventions enabling a modern economy [2]."To the economist the
concept is essential, for without limited liability capital acquisition would be difficult indeed." [3] The historical evidence is that limited liability corporations enabled using excess capital far more efficiently than previously, which is why pretty much every country in the world has adopted it. It was clear early on that those countries not adopting it were falling behind economically.
>Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
Before limited liability, unlimited liability was the norm. If a merchant invested some of his profits in a ship, and the ship sank, then those with cargo on the ship could sue the merchant for all the merchant was worth, far surpassing the value the cargo was worth. This disincentivized merchants investing.
So yes, investors invest commensurate with the risk. If the risk goes up, they invest less. This was the norm. Excess capital was not being used for fear of losing not only that capital but all capital.
The Dutch invented limited liability in the 1600s in order to tap this unused capital. " The innovation in the case of the VOC was that the liability of not just the participanten but also of the bewindhebbers was limited to the paid-in capital (usually, bewindhebbers had unlimited liability). The VOC therefore was a limited liability company" [1]
This proved so successful economically that all neighboring nations adopted it soon thereafter, enabling a boom in shipping.
Now, back to mortgages, etc. Mortgages are lent by banks (more or less). Before limited liability, the bank was owned by one or more people, and they were liable for any business deals they got involved in that went wrong, and not just for the amount invested in the business, but for all their assets. If they lent a mortgage, and something was wrong, even by acts of God, then the bank and any shareholders could be sued for everything - their entire set of assets, their houses, and even their families houses.
If you don't see how this disincentivises investment or risk taking, then I don't know how else to explain it. I'm far more likely to invest $100 if I know I'll at most lost $100. If I'm possibly liable for $1,000,000, I'm not likely to ever invest that $100.
> Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
We agree on that. When the risks are tremendous, there will be less investment. And this is historical fact.
> Investor invests in building. Lightning burns it down.
False example. The owner of a warehouse (clearly what you mean even though you fail to specify) would in general not have been held liable for the value of others' goods that were lost. As no less than Rothbard pointed out, contracts alone could have excluded that liability, with no need for a corporate structure. Or the owner and/or investors could have purchased insurance, which also predates corporate structure by centuries. The introduction of a new legal entity, which has since been expanded to be equal (or superior to) natural persons under law, was unnecessary to secure the benefits of investment.
> Before limited liability, unlimited liability was the norm. If a merchant invested some of his profits in a ship, and the ship sank, then those with cargo on the ship could sue the merchant for all the merchant was worth, far surpassing the value the cargo was worth.
You just happened to pick an example that has been used to show why the corporate form was unnecessary.
"The corporate form emerged from economic arrangements that mirrored the concept of limited liability offered by modern corporations. One such arrangement was the commenda, a system developed in Eleventh Century Italy ... This arrangement allowed the passive partner to limit his or her liability of their investment"
Robert W. Hillman, Limited Liability in Historical Perspective
People were already investing, without corporations, in the eleventh century. As I said before, your claim was untrue.
> If I'm possibly liable for $1,000,000, I'm not likely to ever invest that $100.
That's why you would write a limitation into any contracts related to that investment, and/or buy insurance. Either could be overridden by acts of gross negligence (an illegal clause in a contract is void and insurance contracts have similar exceptions). If you're negligent or malicious, or authorize others to be negligent or malicious on your behalf, you damn well should be liable for a proportional share of damages which could exceed the value of investments. Hint: don't do things that harm other people and you'll have nothing to worry about. Did you look up "moral hazard" yet?
> People were already investing, without corporations, in the eleventh century. As I said before, your claim was untrue.
Yes, they did. But investing is not a binary, all or none event. You continually fail to address that less risk means more investment. You fail to address the fact, as quoted above, “ To the economist the concept is essential, for without limited liability capital acquisition would be difficult indeed.”
For someone claiming I fail to see a middle ground, you’re doing it repeatedly.
History shows limited liability spurred economic growth, which is why it’s used in likely every of the 200 plus countries. It’s why economists often list it as one of the greatest economic inventions of all time.
As to contracts, a LLC is a contract. As to gross negligence, it violates protections of the LLC. The contracts you argue for are a LLC.
Do you claim investment would be at the same level without limited liability?
> History shows limited liability spurred economic growth
Not even all forms of limited liability are equal, let alone all forms of corporate structure of which limited liability is only a part. To argue that all of the extensions to corporate personhood over the last 200 years are justified because of economic growth over the same time is not only to conflate different things but to confuse correlation with causation. That's where this discussion started - not with limited liability alone, but with corporate personhood in general, so I guess we can add the fallacy of composition to your trifecta. I refuse to engage with more such sophistry.
That's a good idea, since your contract argument simply reinvented limited liability. Also your black and white thinking is off: for example, I never argued about "all extensions are justified by economic growth," nor have I continually reduced positions to binary when they're clearly not. I think you're arguing against what you want me to write instead of what I've actually written.
I'm sorry, but how do you square that with the legal rights via judicial precedence they have, like those described in https://en.wikipedia.org/wiki/Corporate_personhood ? How do you square it with the plain language of the USC on the matter (https://www.law.cornell.edu/uscode/text/1/1) ?