We've had limited liability for centuries, and it's completely critical for getting people to invest in businesses. Without it, nobody dares open anything larger than a lemonade stand, unless they're already extremely wealthy.
For a handful of organisations, yes - though the adoption of limited liability structures en masse dates only to the late 19th Century, at least in England.
To put it another way, we managed to run the industrial revolution with pervasive unlimited liability, so it seems likely that 'completely critical' is substantively overstating it.
We can split hairs about what adjective applies, but the point is that limited liability is a fantastic idea and a big positive in letting people get involved in a business. Limited liability makes it substantially easier for small-time investors to get involved in economic windfalls.
We should be striving to equalise access by both the poor and the wealthy to making money. Limited liability makes it safe for little investors (the people who can't afford a personal lawyer and accountant) to invest in a company.
Take away the limits, and it is no longer safe for small investors to invest in large companies. A big scandal and small shareholders could be wiped out. People who, realistically, had no actual control over the corporation and who were just trying to tap in to the wealth creation engines of the broader economy.
Removing limited liability provisions (1) doesn't target the executives, who are decision makers and (2) tips the field towards an "only the wealthy can afford the risk of investing in stock" equilibrium - even if just a little bit.
LLC isn't a serious mechanism to "privatise gains, socialise losses". That is achieved when the US government sweeps in and gives large cash infusions to incompetent bankers so they can pretend that bankruptcy is a mysterious phenomenon that threatens consumers rather than being a realisation of the incredible damage that they are doing with their own bad decisions. You can easily have both well remediated minesites and LLC laws in the same story. Just beef the regulation up a little.
1. $200 is what it costs if you do it yourself, $1000 with the help of an attorney and accountant.
2. What's a lot? Losing even a $100K house is devastating. Having a failed business's creditors take away everything because a customer fails to pay a bill in a timely manner and causes a cascade of failed bill payments from the business is crazy... which is the main reason you incorporate - routine business risks are... riskier than most people's personal life.
Limited liability is a tool for everyone and I would argue matters more the less wealthy you are. I say that having started four businesses, with about a month worth of operating cash... Started three part time on the side, and without the corporation self-employment tax alone would have crushed the business, let alone a lawsuit against my family because of a routine business issue. It also helps in reverse - a financial problem a partner in a small business has generally is not able to reach through the business to take assets from the company. It might change who the owners are, but it doesn not allow people to reach through to the business.
> Having a failed business's creditors take away everything because a customer fails to pay a bill in a timely manner and causes a cascade of failed bill payments from the business is crazy... which is the main reason you incorporate - routine business risks are... riskier than most people's personal life.
Bills and other debts can be subject to limited liability when the other party explicitly agrees to it.
My point was that damages to 3rd parties who didn't agree to the conditions of limited liability, like people affected by hazardous chemicals(see https://en.wikipedia.org/wiki/Bhopal_disaster), unsound structures, unsafe workplaces, environmental damage and so on should not be denied restitution because of limited liability. Neither should the taxpayers pick up the tab in such cases.
Being poor — or indeed normal —means not having $200 to spare on making yourself resistant to bankruptcy. Tech workers like us are much richer than most: I started on my country’s national lifetime average salary, and most recruiters now expect me to ask for double the local national lifetime average.
Plenty of normal people incorporate... It isn't about resistance to bankruptcy... It is about avoiding a whole swath of life altering problems that a corporation prevents.
The inability to keep assets hidden ("safe") means an LLC would be more valuable for a non-wealthy person. While a wealthy person squirrels away their assets somewhere, a poorer person needs LLC protection exactly so their personal assets don't get taken away.
To the last point, losing everything, even if it's less, would be more devastating than a richer person losing half of what they have in a judgement. So a poor person needs a LLC to avoid the calamity of everything being taken.
Before LLCs it was only established families or folks with very wealthy patrons/backers who started companies. Now millions of people from every financial status do so. The proof of the pudding is in the eating.
You're assuming that if the law changed the wealthy would sit there and accept the liability. They wouldn't. Without any expertise whatsoever I can imagine a massive pools of capital lending to companies at extortionate rates (~13%, or whatever predicted profits are + 5%), and the owners of the companies would be shell entities or some patsy to take the fall. That way the profits could be harvested across ownership boundaries and the people with the capital would be protected as lenders not owners.
The people with resources would set up ad-hoc schemes like that would limit their liability somehow, slipping loopholes in to the legal system. The small players wouldn't have the resources to play that sort of game. The more there is to lose the more effort would be diverted into protecting it.
So what do you think happened BEFORE limited liability companies existed? And what do you think happens in countries that don't have limited liability companies? And what about all the people who create businesses without creating a limited liability company?
As someone else says, partnership structures. These have a very limited ability to raise external capital.
I'm slightly surprised to have to argue on a site built on providing venture capital as equity to startups that also issue equity to employees that exposing all those investors to the risk of losing their homes as a result of action by those they have only a very limited control over is a bad idea.
> what do you think happens in countries that don't have limited liability companies?
There is an excellent book on this, The Other Path by the economist Hernando de Soto, on extra-legal systems in Peru.
And in Third World countries where you don't have good formal legal systems, the environmentally destructive exploitation projects still happen, with the complicity of the political structure - and often substantial amounts of extra-legal violence. At least in the US you can sue Cloud Peak Energy without getting your legs broken.
It's also worth looking at what happened to the Lloyds "Names", who were supposed to be unlimited-liability reinsurers.
None of this is to say that coal companies should be allowed to commit environmental damage and get away with it, but it does mean that the system needs to be better in preventing this in the first place.
A lot of countries don’t let their professionals incorporate. Usually for the reason that victims of professionals shouldn’t end up paying the costs of their victimization.
It’s also why you’ll see professionals put their home in their spouse’s name, just in case.
People without connections got made examples either for actual misconduct or as a pretense for felony interference with a business model, the connected got away with literal murder, but no matter how harsh the punishment didn't deter the desperate masses of aspirants from trying to make it big fast through dodgy means. See China and CEO misconduct for an example.
People can still get insurance that allow the risk to be priced in. Without such a mechanism, the risk is completely ignored, and society has to bear the cost when things go wrong. If taking this risk into account slows down investment, maybe we don't need such reckless investment that puts people's health, lives and the very future of the species at risk.
Its funny that every time when poor people ask for something like student debt relief, the familiar old sermons about personal responsibility are trotted out. But when the rich are asked to be held to the same standards, we are told that it is just not possible, society itself would collapse and so on.
In the context of this discussion, I read it as more of an argument that requiring a cleanup cost bond or some mandatory specialist insurance before mining operations can begin is a better solution than removing unlimited liability.
The Islamic world operated on partnerships rather than corporations up until quite recently. Some important parts of society (GPs, law firms, auditors until a few years ago) still do.
To put it another way, we managed to run the industrial revolution with pervasive unlimited liability, so it seems likely that 'completely critical' is substantively overstating it.