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Incorporation and Limited Liability

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Is there a particular aspect of this that you have an issue with.

As pertains to the "limited liabiilty" structure, I think the corporation as a legal entity is necessary, but not sure what else is referred to under the "Corporate personhood" concept.

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I'm biased from the start to agree with the concept, since it ostentatiously is part of the wonderful English/American tradition of capitalism. I'm just curious (before I get invested in the idea too much) that it checks out morally. The connotation of "collective person" does raise some suspicion.

I think as long as it is understood by lawyers, judges, and the parties involved that it is merely a legal term that signifies the umbrella of consenting individuals it is OK (not just OK, excellent).

Is my reasoning correct here?

PS - This is related to my interest in becoming a commercial litigator. Here is link on wiki that explains some of the muck that socialists have thrown at the concept of "corporate personhood": http://en.wikipedia.org/wiki/Corporate_Personhood_Debate

Edited by mb121
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Is there any legitimate debate within the Objectivist sphere against the concept?

Corporations are obviously not people –they are groups of people who share a common purpose. However an individual does not lose his rights by acting on behalf of a group. The purpose of the group is irrelevant - whether a group exists for the purpose of prayer, or political advocacy, or profit does not change the rights of the people involved.

The attack on “corporate personhood” is an attempt to deny the rights (primarily the freedom of speech) of people working for certain non-politically correct groups – namely groups with the primary purpose of making a profit. This is just a veiled attack on capitalism and property rights.

Edited by GreedyCapitalist
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The connotation of "collective person" does raise some suspicion.

Corporate person is an kind of collective person and as such it is exactly the same contradiction - collective pertains to a group of people and is not a person. So individual rights by definition cannot apply to a corporation as entity. How would you define a right of corporation to life, anyway?

The right to property, however, can apply to a group of people as an instance of consistuent individuals' right to property: individuals agree to share some of their property on some objective conditions. Corporations, trusts, cartels, families are examples of such group.

Other rights also apply to a group of people in the same fasion, e.g. catholics have a right to life and builders have a right to pursue of happiness. But in these cases, "right of a group" is simply a formalism acknowledging that man is still man, whatever group he's in: there is no way to share some of your life or some of your pursue of happiness with other in the same sense of the word 'share' as in case of right to property.

Now speaking about the article, corporation's right to speech cannot pertain to the corporation as an entity, given that no corporation can't speak. What can such right mean to is that members of a group (and corporation, in particular) have a right to appoint a man to speak out for the whole group. Limiting such a right means limiting the group-members' right to life.

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Corporate personhood is an unfortunate bit of legal metaphorical legacy, arising out of the need for a corporation to own property and to make contracts. Neither the law nor Objectivism holds or could possibly hold in a sane universe that corporations are rights-wise equivalent to humans. The 4th and 5th amendments do not apply to corporations; a corporation cannot hold public office, cannot be incarcerated, and cannot vote. Solan's book The language of judges. has a section on the twists and turns in this idea of personhood in the US.

The efficiency of being able to acquire and dispose of property and form contracts without having to get the signatures of all 200,000 shareholders is a good thing. There is a real question in Objectivist circles whether the limited liability aspect of the corporation is good or bad. Beyond that, I don't see any validity to applying the concept of "person" to corporations, and it does actual conceptual harm because obviously a corporation isn't a person, and yet this topic comes up, leading people to conclude that "person" is an arbitrary social construct to be redefined on a whim.

The earlier view from US v. Deveaux, that the rights of corporations is a function of the rights of the involved individuals, is a good foundation, but that was then and this is now, if you know what I mean.

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There is a real question in Objectivist circles whether the limited liability aspect of the corporation is good or bad.

hmmm. I haven't seen that debate. And where do you stand? I view it as almost indispensible feature of modern corporate structure, but haven't seen the opposing side.

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And where do you stand? I view it as almost indispensible feature of modern corporate structure, but haven't seen the opposing side.
The logically prior question is limited liability, in general (apart from corporations). Should it be possible for a man to do wrong and escape responsibility; if so, under what conditions? Ordinarily, if I as a businessman sell poison as food or roofies as toys, then I would be liable for the resulting damage and I cold be made to pay a million or so; and this is a personal liability, not limited to the value of my food-stand named "Odwalla Foods". If I incorporate, then my personal assets are shielded and I cannot be held responsible for my wrongful actions. There is where the wrong lies in the system.

OTOH it would also be wrong for the courts to confiscate my personal wealth because I happen to own some number of shares in Odwalla Foods, Inc,. since I did not deliberately and knowingly poison innocent babies. The mistake is lumping together the actual evil-doer and the innocent bystander shareholder.

On the third hand, given the practical problem that juries are willing to make obscene rewards based not on the wrong-doing of an actual person but on the basis of the level of suffering of the victim, limited liability does serve a useful function in the increasingly socialist society that we live in, in limiting the initiation of force against those who are financially successful and who happen to have an actual decision-making role in business. Thus I would conclude that ideally, liability should not be limited for those who actually make a wrong choice, but that the cognitive corruption of the concept "wrong choice" is presently enough to make me want to leave things alone.

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Should it be possible for a man to do wrong and escape responsibility; if so, under what conditions?

I think this approaches it from the wrong angle. Is there such a thing as *unlimited* liability? Are you responsible for *anything* that could conceivably be said to come about as a result of your actions, nigh unto the fourteenth generation? No. If you call some girl a skank and she kills herself, it is not your responsibility.

I think the phrase limited liability could more accurately be expressed as *delimited liability*, as in you've drawn up strict rules just for what you are liable for because you are thinking ahead of situations that could possibly arise, such as a business failure. With *delimited* liability, people can easily review the contracts and decide whether they are willing to deal with you under those conditions.

All the complaints I've ever heard about corporate "personhood" come down to a complaint that corporations supposedly have rights that people actually don't have (they don't), so the solution is to take away all the rights of all the people that belong to the corporation. The solution is simply to point out that corporations are no more permitted to violate rights than individuals are. (And if they are, that needs to be fixed.)

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Liability, in the context of limited-vs-unlimited liability, is in particular the liability of the owners of a corporate entity for that entity's debts. In general, if a company incurs debts and cannot pay them out of its capital assets and revenues, then the owners of that company must liquidate the company and then must pay the difference out of their own pockets. The owners of a company by default take on full risk for the company defaulting on its debts. A company set up with limited liability writes into all its debt contracts that the the debt owners (the lenders) take on full risk for the company defaulting on its debts: the owners of that company must liquidate the company to pay as much as possible of the company's debts, but their risk in owning the company goes only that far, and it does not extend into their own pockets. Limited-liability companies are very popular for owning shares in because their shareholders do not risk losing everything they own, merely all of the value of the shares they purchased. Note that limited liability is perfectly legit: it is a stipulation on all debt contracts, and the debt owners are free to accept or reject this stipulation as they see fit.

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mb121,

I think as long as it is understood by lawyers, judges, and the parties involved that it is merely a legal term that signifies the umbrella of consenting individuals it is OK (not just OK, excellent).

Is my reasoning correct here?

I am a lawyer but not well-studied in the jurisprudence regarding corporate personhood. Even so, I am interested in this topic and here are a few of my thoughts. Perhaps other lawyers might like to correct me or weigh in.

Contractual Basis

"In a capitalist society, all human relationships are voluntary. Men are free to cooperate or not, to deal with one another or not, as their own individual judgments, convictions and interests dictate." --Ayn Rand

An example of such an agreement to deal with one another is a “corporate charter,” which establishes the “corporate entity" -- setting forth the purpose of the entity, the nature of ownership shares, the voice in corporate governance in relation to the proportion of ownership shares, mechanisms for resolving conflicts among the owners, etc. Fundamentally, I think a corporate charter is in the nature of a contract.

With notice of the nature of the corporate entity, others are free to deal with it or not.

Government Recognition

That a government should recognize a corporate entity is proper on the basis that the government should recognize any moral, contractual relationship between individuals.

All the freedoms and rights of a corporate entity are derivative of the freedoms and individual rights of its owners, which are those of natural persons (whether the ownership by natural persons is held directly or held indirectly through another corporate entity).

Limited Liability

This is a separate issue. Apart from a direct contractual basis with those who voluntarily deal with a corporate entity on such terms, limited liability of the shareholders is normally allowed for a corporate entity that meets certain statutory requirements of minimum financial responsibility and gives public notice of its status. It applies even if not previously agreed to, for example, in the case of a car accident between a corporate vehicle driven by a corporate employee and another car driven by a person who never even heard of the corporation before. But it does not seem the provision for such limited liability in general would be essential to the recognition of a corporate entity, which would still provide many other benefits for the management of a business, especially for one having more than a few shareholders.

Edited by Old Toad
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  • 1 year later...

I submit the idea that a corporation is, by its definition, anti-objectivist principles, for consideration.

A corporation is a legally defined entity that exists independently of its owners. It serves the basic function of separating owners from the responsibility and the risk of the company.

While I currently have an LLC for my real estate, and am considering another for a separate project I'm working on, it occurs to me that all forms of incorporation are, essentially, Government involvement in economics.

The Government, by granting me an LLC, grants me legal protection from responsibility for my properties. (I own real estate) If someone is harmed on my property due to my neglect, they can sue the LLC, and the LLC can lose out, but my house and my other assets not tied to the real estate are protected. The Government basically grants me special status as the owner of an LLC - status the Government really has no business granting me.

In essence, Corporations allow me to generate profit without the risk and responsibility tied to my business operations. At the large megacorporation level, this separation is even more glaringly obvious. Stockholders in a corporation bear only the risk of the value of their shares, regardless of the behaviors the corporation engages in.

So I pose the question - should an Objectivist Government legally recognize corporations and give them special status, as happens now?

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The Government, by granting me an LLC, grants me legal protection from responsibility for my properties.

No, the government recognizes the fact that you cannot be held responsible for your property, while someone you hired is running it (if your landscaper murders and buries someone in your back yard, you're not responsible for murder), you can only be held responsible for your actions. And the people in charge of your property can be held responsible for their actions. In your case I'm assuming you're both, so it's not even an issue.

What the main purpose of the limited responsibility corporation title is, is to let creditors know that they cannot count on their money being returned to them, except if the venture itself is succesful. That puts some of the responsibility on them, for the success of the venture. It is a voluntary and mutually beneficial business arrangement between creditors, shareholders (who have no time running a company) and specialized workers (executives, regular employees) who have no capital to start their own venture. It is in fact the most lucrative business model in the history of capitalism, and without it I would put us some place in the 1950's, as far as technological progress and prosperity go.

But I'm sure there are laws and regulations that are intrusive or unfair in someoen or other's favor, regulating corporations. That does not take away from the corporation as a business model, which would exist fine, in various forms, without standard government licensing. The Courts would then have to read the founding document of each firm, and all contracts the firm made with its creditors, and decide if the owners are to be held responsible in civil court, by contract, beyond what the value of the firm is. I assure you that most firms would still be set up the same way. In criminal court, of course, you cannot be held responsible except because of your actions, so shareholders would have no responsibility for what executives do with a corporation, in that sense.

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No, the government recognizes the fact that you cannot be held responsible for your property, while someone you hired is running it (if your landscaper murders and buries someone in your back yard, you're not responsible for murder), you can only be held responsible for your actions. And the people in charge of your property can be held responsible for their actions. In your case I'm assuming you're both, so it's not even an issue.

You're using an irrelevant scenario here, I'm afraid.

If I own a company, and I hire employees, and following my instructions, acting on behalf of the company, the employees act in a negligent manner and cause someone harm, however, then I, as the owner of the company, do bear responsibility for what my agents do. If I employed people and *told* them to murder someone, after all, I would bear responsibility for the murder as much as the murderer.

What the main purpose of the limited responsibility corporation title is, is to let creditors know that they cannot count on their money being returned to them, except if the venture itself is succesful. That puts some of the responsibility on them, for the success of the venture. It is a voluntary and mutually beneficial business arrangement between creditors, shareholders (who have no time running a company) and specialized workers (executives, regular employees) who have no capital to start their own venture. It is in fact the most lucrative business model in the history of capitalism, and without it I would put us some place in the 1950's, as far as technological progress and prosperity go.

But such a guarantee shouldn't be made by Government, that's my point. Nothing stops you and I from becoming partners and me drafting a contract that says, "You're going to put in $100,000 and if the company makes money, you will make money, but if we go bankrupt, you may lose your money." and the Government should recognize such a contract as valid.

The automatic favored status bestowed upon myself as an owner of an LLC and upon owners of corporations by the virtue of Government ratification is what I have the issue with, not the creation of the entity by business partners with clearly defined contracts that specify the limitations of risks and responsibilities to 3rd party investors and small stock holders.

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In essence, Corporations allow me to generate profit without the risk and responsibility tied to my business operations.

That is incorrect.

Here is a thread where it was discussed: http://forum.ObjectivismOnline.com/index.p...Liability\

The first L in LLC stands for "limited," or as Jenni points out, what you get from a corporate structure is actually delimited liability. It's not that you have no risk or responsibility, it is that the risk and responsibility is broken up, and you are a priori knowledgable about what risks you're taking on when you obtain ownership.

As such, it is a form of objective law, and an indispensable tool of modern corporate financing. If someone has an issue, it in essence is with the fact that liability can be broken up at all. As such, the campaign for "unlimited liability" severely damages the ability to finance large corporate entities.

Edited by KendallJ
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  • 7 months later...

*** Mod's note: Merged topics. - sN ***

I'm not sure how to respond to this:

"The most radical intervention in the market in the history of the world was the state creation of the limited liability corporate person. The so-called debate between free markets and intervention is a false one. Unless one is willing to be entirely consistent about free markets, including the elimination of corporate personhood, then we are really just debating about the degree of intervention. It is far from the case that less intervention is always a good thing. When there are a whole set of interlocking regulations that may have achieved a sort of balance, and removing one could produce dire consequences. It was exactly this type of deregulation which produced the recent financial crisis.

Not to mention that the wealth inequalities that are an inherent byproduct of capitalism allow the powerful an unfair advantage in steering legislation.

Thus, anyone seriously concerned with removing undue influence from government must strike at the heart of it, at interventions like corporate personhood. Other mechanisms can also come into play, such as the estate tax, in the interest of preserving freedom from the corrupting influence of aristocracy.

Pragmatism regarding regulations is a necessity, considering the entrenched nature of our regulatory structure. So unless one is some sort of "anarcho"-capitalist or some other ridiculous thing, and believe in tearing down all government, then one must look at regulations on a case by case basis."

it seems some people are mixing corporate personhood/corporatism with the recent supreme court decision.

Edited by softwareNerd
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The attack on corporate personhood only make sense from the collectivist mindset, it is a collectivist critique.

A collective is not merely a group of individuals. Where collectivism goes wrong as a theory is its reification of the group as a new entity whose welfare is considered as separate, more real or more important than any individual comprising it. It is the hierarchical priority of the group over the individual that leads to poisonous and destructive consequences. In the collectivist imagination, some novel and foreign element comes into existence upon incorporation, something inhuman and wicked. This is every bit as stupid and superstitious as anything some tongue-speaking, snake-handling evangelical voodoo practitioner could ever say.

A corporation is an instrument that makes it possible to conduct business without having to draw up contracts acknowledging each individual involved with the business. Whenever a corporation acts or speaks, it is still the action of one or more individuals. It is not possible to restrict a corporation's speech without restricting some individual's speech.

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I'm biased from the start to agree with the concept, since it ostentatiously is part of the wonderful English/American tradition of capitalism. I'm just curious (before I get invested in the idea too much) that it checks out morally. The connotation of "collective person" does raise some suspicion.

The "personhood" of corporations is a privilege extended by the State to a business firm to protect its principal members and asset holders from liabilities under the Common Law. What it means is that if a corporation goes belly up or loses a law suit, the Courts cannot come after the personal assets of the stockholders, as in the case with a partnership or a single proprietor firm.

Without the State there would be no corporations.

Bob Kolker

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Without the State there would be no corporations
By analogy, without the state there are no rights.

BTW: Since you are someone who has hung around these and other Objectivist forums for years, I expect you're familiar with the arguments for corporate entities. To ignore it and simply post something like this is disingenuous.

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The "personhood" of corporations is a privilege extended by the State to a business firm to protect its principal members and asset holders from liabilities under the Common Law. What it means is that if a corporation goes belly up or loses a law suit, the Courts cannot come after the personal assets of the stockholders, as in the case with a partnership or a single proprietor firm.

Without the State there would be no corporations.

Bob Kolker

If we start from the position that government's sole purpose is to protect individual rights, could you tell me what the government would be protecting individuals from by not allowing incorporation?

In your post you imply that the limited liability feature is harmful. How so? Contracts are agreements. Agreements are a two-, three-, thousand-way road. To use Peikoff's scenario:

An individual can say to a storekeeper, "I would like to have credit, but I put you on notice that if I can’t pay, you can’t attach my home—take it or leave it." The storekeeper is free to accept those terms, or not. A corporation is a cooperative productive endeavor which gives a similar warning explicitly.

- Leonard Peikoff

People and businesses who find themselves having to make the decision of whether or not to work with a corporation must take the risks into consideration before they sign any contracts or make any agreements. It is for the reason that if they weren't valuable, the free market would eventually weed corporations out of the system.

And as for your comment about the State: what does it have to do with anything? Is the State forcing people to do business with limited liability organizations? If they are, would it make sense to regulate the businesses instead of taking action against the government?

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The "personhood" of corporations is a privilege extended by the State to a business firm to protect its principal members and asset holders from liabilities under the Common Law.

Shareholders and executives in corporations are subject to the same exact laws non-shareholders are subject to. There aren't any laws which make incorporation illegal, so I can't imagine what law you are referring to.

Maybe you're misunderstanding what a liability is: it's an obligation arising from past contractual commitments. Corporations, by definition, do not and cannot commit to any obligations beyond the limits established and published in their founding documents. Are you suggesting that someone can have liabilities that they didn't willingly assume?

Edited by Jake_Ellison
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