I was merely referring to the historical fact (again, from what I have heard). It does make a perfect logic to me though. At first it sounds crazy (nowadays) and that's what Wall Street wants you to believe so the "show" can go on, but in reality that's the way it should be. If you're the "true" owner (you have a personal stake, not just share price) of the company then you care not to mess up, you don't artificially dive share prices up, you grow your business responsibly. And as a result you participate in any upside (share price and/or dividends). If that ends up being artificial (pump) over the years then it means it was not deserved or someone gamed the system at the expense of others. You need a proper perspective on what kind of change would that inflict on the markets (and people) first and then worry what it means for ordinary share holder. The gaming, when it happens, is caused by the big guys (shareholders) and management (shareholders or worse, options on shares), not by the small unsuspecting shareholder. Should you had that kind of (personal liability) system in place, there would be much less gaming and mess-ups in the first place, so it's a win-win for everybody. Look, what is the point of let's say LLC company? To make sure that your risk is capped and that you won't be liable personally for your own mess ups... but that means someone else will be left holding the bag with your $hit. If you can't grasp that simple (indisputable) fact, then there is no way to grasp the validity of what I described earlier. Anytime you have an environment where one party has a huge or unlimited profit potential with very little to no risk, it always ends up badly. Not for that party of course, it is always someone else that picks up the tab.
I do understand your point, but I just don't really know how this could be realistically structured. I mean, yes, it makes sense for partnerships/sole proprietorships, but those are, generally, small firms, with few principals. How can you have a large public company where some or of the shareholders accept unlimited liability? Anyways, it's an interesting question and people have thought about it a lot throughout history. The current arrangements are loosely based on the Common Law concepts that evolved in England after the Norman conquest. There have been various critiques of limited liability throughout the years, by various people. There has also been broad support.
Limited Liability is crucial to the growth of an economy. When tail risk is socialized, it allows businesses to grow. Shareholders already have skin in the game to prevent excessive risk. There are some shareholders who figure out that they can take extremely excessive risk and they will be bailed out (like the banks in 2008 or LTCM), but overall it allows entreprenuers and businesses to make investments they otherwise couldn't.
Yes, moreover, isn't there also a sort of a "libertarian" argument here (made by some eminent Austrian economists)? Specifically, if the various stakeholders wish to structure their business relationship with limited liability, who's to say they shouldn't be able to? Caveat emptor and all that jazz...
As far as the "broad support" goes, something tells me that most bad concepts are almost always done (now and through the history) by lobbying the lawmakers, not passing what is "right". As much as I hate wiki for source of reliable information, being short on free time I decided to look up that source and there is an interesting 5min read on that subject, especially regarding history and criticism. Take a look: https://en.wikipedia.org/wiki/Limited_liability As you pointed out, from the beginnings of limited liability it was a controversial issue but slowly and surely it has been pushed through. But we can at least agree, that just because something end up being a law, doesn't mean it is "right" or "just". Notice how even unlimited liability for managers and directors was slowly but surely eradicated. I really like the words of Edward William Cox from 1855, which is around when the whole battle on the issue took place (and got lost): That he who acts through an agent should be responsible for his agent's acts, and that he who shares the profits of an enterprise ought also to be subject to its losses; that there is a moral obligation, which it is the duty of the laws of a civilized nation to enforce, to pay debts, perform contracts and make reparation for wrongs. Limited liability is founded on the opposite principle and permits a man to avail himself of acts if advantageous to him, and not to be responsible for them if they should be disadvantageous; to speculate for profits without being liable for losses; to make contracts, incur debts, and commit wrongs, the law depriving the creditor, the contractor, and the injured of a remedy against the property or person of the wrongdoer, beyond the limit, however small, at which it may please him to determine his own liability If one agrees with Cox's perfect explanation, then there should be no excuses in applying it throughout, regardless of company size or whatever other reason one can think of (to justify his flawed ideas). The debts incurred can't be reset as most think nowadays. It is always someone else picking up that debt. It's always the same group of people that ends up with the trash and same with ill gotten profits. Unsustainable model.
I beg to disagree. That "socializing of the tail risks" has nothing to do with allowing or not business' opportunity to grow. If the business idea is so great they will surely be a creditor willing to extend the credit, albeit with proper guarantees. The "socializing" of tail risks you talk about, is an open door to dumping the risk on unsuspecting parties. A "free ride"?
Yes, I saw this Wikipedia article and I appreciate your point and your criticism... Still, on balance, I am not sure why people shouldn't be allowed to conduct their business affairs in any way they deem appropriate.
Good point, but as I mentioned earlier, we first need to determine whether limited liability is the right concept to begin with. Then, even if that were so, there is an interesting explanation to the issue you've raised in the wiki paged I linked earlier: Anarcho-capitalist Murray N. Rothbard, in his Power and Market (1970), criticized the need of limited liability laws, observing that similar arrangements emerge upon mutual and voluntary agreement in a free market: Finally, the question may be raised: Are corporations themselves mere grants of monopoly privilege? Some advocates of the free market were persuaded to accept this view by Walter Lippmann's The Good Society. It should be clear from previous discussion, however, that corporations are not at all monopolistic privileges; they are free associations of individuals pooling their capital. On the purely free market, such individuals would simply announce to their creditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. It then rests with the sellers and lenders to this corporation to decide whether or not they will transact business with it. If they do, then they proceed at their own risk. Thus, the government does not grant corporations a privilege of limited liability; anything announced and freely contracted for in advance is a right of a free individual, not a special privilege. It is not necessary that governments grant charters to corporations. Perhaps my understanding of the above is wrong, but the way I see it is that by granting charters of limited liability you end up down the road with a system that would never evolve that way by itself, at least not to such size. In other words, if limited liability was a free right but required a special effort, the free market (investors/creditors) would have likely rejected it (it would be a minority). By including that form in a common law, it had easier way to evolve and once the critical mass is achieved you can't stop it as it becomes a "new normal" so to speak, so everyone thinks that's the only way it can be, not understanding where are all it's side effects coming from. Just like in the banking system, people wonder why we have boom&bust cycles...
Yes, yours is a possible interpretation, for sure... Still, it's hard to know what would have been the predominant form of ownership in the absence of the specific law. It's a difficult counterfactual for me to think about, tbh. At any rate, like I said, I see your point and I think it's a valid criticism. But the issue is complicated...
LLCs are great for one reason: to shield your personal wealth from lawyers. I would not have started a business had LLCs not existed.