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Incorporation and Limited Liability

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mb121

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What Kolker is saying, or should be saying if he intended to make any sense, is that like the contract, the corporation is a "creation of the state" because it involves a legal relationship, one which necessarily involves the state. A contract is an agreement that is recognized, adjudicated and enforced by the state. A partnership is a creation of the state in the same sense, as is a trust. Civilized life is made possible because of the state, which regulates the use of force. BFD.

A corporation is a group of individuals (maybe a huge group) who declare "We offer various goods and services; and if you deal with us in any way at all, you must accept this universal condition -- no individual who is part of this corporation will be personally liable for our products and actions. Your legal recourse is limited to the assets of the corporation".

Now, the thing is:

Are you suggesting that someone can have liabilities that they didn't willingly assume?
It is a fact that a person can have a liability that they did not willingly assume. If I do a million dollars worth of damage to you in carrying out my part of a contract, then unless there is an explicit contractual limitation on my liability, then I am liable for a million dollars. A person cannot "willingly" do something that they do not "knowingly" do, and a person can easily not be knowing that a million dollars worth of liability can result from (random selection) selling carriage wheels. You must willingly enter into an agreement, and it must be 'somehow computable' that the agreement entails the liability, but that does not mean that a party to the agreement willingly assumed the liability. The key is the 'somehow computable' part of liability; to the extent that the legal system behaves irrationally in going after defendants just because they have deep pockets, then we cannot say that liabilities are willingly assumed.
Maybe you're misunderstanding what a liability is: it's an obligation arising from past contractual commitments.
Liability also arises outside of contractual commitments, especially through negligence. And this is the huge problem for the "it's all a massive contract" theory. Regardless of what you might say in a contract, if someone goes after you for negligence, there being no contract to begin with, so there is no way to limit liability. They spent 100 years trying to destroy privity of contract, starting in 1816.
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*** Mod's note: merged threads. sN ***

I'm studying Business Law in school. I was taught that a company is a "separate legal entity" and it possesses (company) rights. And a company can act like a human and sue third parties (human or company). What is the Objectivist's take on this? Do companies have rights?

Edited by softwareNerd
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I'm studying Business Law in school. I was taught that a company is a "separate legal entity" and it possesses (company) rights. And a company can act like a human and sue third parties (human or company). What is the Objectivist's take on this? Do companies have rights?

A better way to ask the question would be "Do individuals lose their rights because of the form in which they choose to associate with each other?"

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  • 2 months later...
Let's say that a Taxi company wants to make all of their taxis into corporations. Would businesses be allowed to pierce the corporate veil, unless the parties agreed to this?
Could you clarify your question?

Do you mean: the company would make each cab a separate corporation so that if the cabbie meets with an accident, they can claim that their liability extends only to the residual value of that cab?

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Do you mean: the company would make each cab a separate corporation so that if the cabbie meets with an accident, they can claim that their liability extends only to the residual value of that cab?

Yes, that's what I meant.
Since nobody else responded, ...

My thought is that this is fine. When one drives, one can be hit by nearly bankrupt people and it can be their fault, and one cannot recover anything from them. Presumably, someone owns the roads and would insist on third-party insurance for all drivers. If not, the risk of such an accident are low and one's own insurance would cover it at a price.

In any case, I assume that under a good system most normal accidents would be the driver's problem, not the company's. So, even if the company owned the car as part of the larger corporation, I don't see why it should be liable. I'm open to correction on this, but in most typical cases of accidents, I don't see why a third-party should be allowed to go after a company if their driver makes a mistake when he is driving a car for them, and not when he is driving a car to the mall on the weekend. I think it is really unwise for a cabbie to go without insurance when he drives so much. So -- even in absence of rules that insist on insurance -- I assume that most cabbies in this situation would take insurance so that they are not wiped out by a suit.

This type of "transaction" is different from the typical corporate transaction, because when one is driving one is interacting with all sorts of strangers, from paupers to multi-millionaires. In more typical transactions, one can check whether the organization you're interacting with is incorporated (which they almost always will be).

Edited by softwareNerd
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I'm open to correction on this, but in most typical cases of accidents, I don't see why a third-party should be allowed to go after a company if their driver makes a mistake when he is driving a car for them, and not when he is driving a car to the mall on the weekend.
Basically the reason is that the passenger is really the second party and the company is the first party. The agreement is between the passenger and the company, and the company possibly subcontracts the job or possibly hires an agent to perform for them. So the reason you sue the company is the same reason you sue the contracting firm that you hired to build your back porch, and you don't sue the individual (probably uninsured) worker who happens to be the one that cuts through a supporting beam. Correspondingly, the agent (when authorized) will not be liable to the customer.

For such a scheme to work, the owners would (should) have to do more than just forming a load of corporations, they would have to not have an agency relationship with the driver. If the driver is truly independent, then he can act on his own to pick up fares, set policies, etc. He will not represent himself as being an agent for someone else (will not be yet another "Yellow Cab"). If the agent has no authority (express or implied) to act on behalf of some principal, then a supposed principal would not be liable. Actually, I think that having a company form 19 corporations for their 19 cabs would be recognized as a shell game, and could not overcome their liability for the acts of their agent, since the cab driver would still be their agent.

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How does that work with something like an independent franchise? Some restaurants operate that way; they are an independent franchise of (say) Wendy's and don't honor specials (i.e., sales and coupons) that Wendy's advertises. Obviously there are two different degrees of independence here, "owned directly by corporate" and "independent franchise" and I wonder how that would play out in liability if (say) someone got food poisoning from a salad.

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It'd be spelled out in the franchise setup, Steve. That's why they put "not available in all areas" or similar legalese into their commercials advertising sales and deals, right?

The degree of liability in a franchise/licensing setup is a bit more complex, in my mind, because there are many different ways to set this kind of relationship up. Some are looser, with the franchisee being basically independent and just sending a portion of their gross receipts up the chain for the privilege of using the commercial assets (name, logos, advertising, etc.) of the parent entity. Some are tighter, with joining the franchise meaning that you have to buy into an inventory system that's managed by the parent entity, so if you get defective stock that's an issue with the parent entity, not just with you. All of this needs to be spelled out in the franchise agreement just for the purpose of saving money if it ever DOES come to a lawsuit.

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  • 1 year later...

*** Mod's note: Merged with an existing topic. - sN ***

http://en.wikipedia....mited_liability

I'm not sure what to make of this. On the one hand, I get why this exists. People don't want people to be fined just for investing in a corporation if there was a disaster that was the result of employees not following protocol. On the other hand, without enough investment, the employees couldn't have made X disaster happen because they couldn't have been in the position to make it happen.

Edited by softwareNerd
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*** Mod's note: Merged with an existing topic. - sN ***

http://en.wikipedia....mited_liability

I'm not sure what to make of this. On the one hand, I get why this exists. People don't want people to be fined just for investing in a corporation if there was a disaster that was the result of employees not following protocol. On the other hand, without enough investment, the employees couldn't have made X disaster happen because they couldn't have been in the position to make it happen.

If you lend your neighbor some money, do you become responsible for what he does with it?

Limited liability is not some novel, extraordinary idea. It's merely the recognition of the fact that "No, you don't". As a law, it has only one purpose: to assure that investors will not fall victims to injustice (and to reassure them of that fact).

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