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Why Were Corporations Illegal Before 1819?

While many here believe that Corporations are part of a healthy Free Market, it should be noted that our founders fought the British Corporations AS WELL AS the British Government.

So when you think it's "libertarian" to defend corporations like Monsanto, think again.


When American colonists declared independence from England in 1776, they also freed themselves from control by English corporations that extracted their wealth and dominated trade. After fighting a revolution to end this exploitation, our country's founders retained a healthy fear of corporate power and wisely limited corporations exclusively to a business role. Corporations were forbidden from attempting to influence elections, public policy, and other realms of civic society.

Initially, the privilege of incorporation was granted selectively to enable activities that benefited the public, such as construction of roads or canals. Enabling shareholders to profit was seen as a means to that end.

The states also imposed conditions (some of which remain on the books, though unused) like these:

* Corporate charters (licenses to exist) were granted for a limited time and could be revoked promptly for violating laws.

* Corporations were often terminated if they caused public harm.

* Owners and managers were responsible for criminal acts committed on the job.

* Corporations could not make any political or charitable contributions nor spend money to influence law-making.

But aren't corporations just part of the free market? Isn't that what capitalism is all about - corporate interests driving the economy?

Actually, no. Corporate libertarians would have you believe that somehow corporate dominance is entirely consistent with the values and vision of the Founding Fathers, but this is pure myth. The framers believed in limited government and free markets, but corporations were almost non-existent in the early days of the Republic. Unlike today, one could not form a corporation simply by filing a few papers with a government office; instead, permission from the government was needed (usually via an act of the Legislature)


Watch "The Corporation" documentary Free,


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So ...

... should government have limited liability as to its employees?

Should YOU have limited liability as to being an employee of someone else's company?

Should YOU have limited liability in any way, shape, or form if you lose a lawsuit?

How would YOU survive if 100% of your income were taken for a judgement, possibly lasting several years?

Yes, in my examples harm was transferred to the plaintiff. But you are not so naive as to believe that every plaintiff who wins received a just verdict, are you?

Should there be ANY limitations as to liability within society?

Do you think O.J. Simpson committed a double murder? One jury said yes; one jury said no. What do YOU think? What would you say if you were the one who lost in a case where you KNEW you were right?

What if YOU were the one who got sued for millions for serving hot coffee? What if YOU were the employee of McDonald's, and YOU served that coffee, not knowing it was over some arbitrary temperature, and YOU got sued because all employees can get sued?

You're not taking into account context

You can't ask those questions of people living in this environment. They only apply to people living under the long term expectations of living in the proposed environment.

The reason is that if a McDonald's employee is subject to getting sued for serving too hot of a cup of coffee, then that employee will take more personal responsibility in ensuring they don't allow anyone to come to such harm. They will stand up to bosses who dictate nonsensical rules or harmful acts.

As far as where the limits should be, that's what we have juries and charities for. Take away the limits on liability and society will quickly return to depending on them and their accuracy.

That's an interesting point ...

... and in a voluntary, stateless society that came about due to philosophical understanding that government is inherently immoral, then you might have a point.

But, I think even in that society there will need to be limitations on liability. Otherwise, you will end up with indentured servants, because we can NEVER guarantee that ALL jury decisions are (a) correct, and (b) just, as to compensation or punishment.

We only have to look at the cases where juries wrongly convicted people of murder to see that.

I think limited liability is a final "check and balance" against dumbsh*ts who WILL sit on some juries.

And that limited liability gets distributed throughout society in the form of businesses factoring in bad debts that they cannot recover in court.

I am against the death penalty for the same reason. Although one who murders deserves to lose his own life, we can not be sure that we don't kill an innocent man.

I also think that given where we are right now, it is an easier case to make to get back to constitutional limitations and THEN go for a voluntary society. But I understand the counter-argument, too, and respect it.

wolfe's picture

But you ignore the damage of the correction.

The correction creates indentured servants of us ALL. I would much rather those responsible be held accountable. And by trying to save one out of a thousand who was wrongly harmed, you harm the other 999.

We are not talking about going to a purely voluntary society. We are talking about eliminating the boons granted by the government to corporations.

Market manipulation is harmful to all reasonable people.

The Philosophy Of Liberty -

wolfe's picture

Bingo... :)

Very short and well put.

Shit rolls down hill as well. If the boss get's sued for something, or assesses that there may be risk, then you will see an improvement in general behavior. That is not the current motivating factor for employees, employers, or owners.

The Philosophy Of Liberty -

Tell me about it!

Most of my jobs have been around large groups of entitled, 'not my job' people. I've seen waste because of laziness, damage because they could get away with it, lack of ethics, lack of responsibility and basically everything possible. It's a wonder these companies (some fortune 500, some defense) can even stay in operation. I realize most of this digresses after other problems but I think it's all related in the person's mind.

It really makes that statistic from TZM hit home that 85% of all current work is unnecessary with just minimal automation. They also said that 95% was unnecessary with strong automation. I have to think that liability problems would be minimized as well.

wolfe's picture

There must be an assumption that a court is reasonable.

Or why bother discussing having any law? I do agree that courts are not always just, especially in our system of law. But to have this discussion believing that they aren't, makes it pointless.

All Limited Liability shifts liability from the abuser to the victim (or in some cases tax payer). This IS what creates the moral hazard. Without adequate risk, people are willing to take otherwise unreasonable actions in the pursuit of gain (whether profit, power, or whatever).

LL caps monetary damages. Personhood effectively prevents criminal prosecution. Both create moral hazards in the marketplace. And no, no one should have limited liability. That is a perversion of the markets.

And lastly, bad shit happens to good people. There are cases where I am sure it would create a tragedy. The tragedy of the solution is worse.

Most human designed fixes to problems, create problems worse than what was resolved.

The Philosophy Of Liberty -

Question to all who think limited liability ...

... for corporate investors is morally wrong or just a bad idea.

Here is the question: Are YOU, personally, opposed to capitalism?

It is a serious question, because some of you seem to be generally opposed to capitalism, per se, not just corporate limited liability.

I am wondering who, if anyone, might be.


wolfe's picture

I think you are terribly confused.

I have very carefully read the comments on this thread, and have not seen a single one that was opposed to business or capitalism.

The only way that you could walk away with that belief is to only be reading what the pro-corp folks claim the anti-corp folks are saying, or be so heavily biased toward believing capitalism requires government interference as to ignore the very real facts/info being put forward.

The Philosophy Of Liberty -

No, some of your comments made wonder about it

You don't seem to be able to distinguish between capitalism and corporatism.

Capitalism in its true form requires very small government.

Corporatism requires very big government.

They are not the same thing, and you are claiming that the formation of a corporation, in itself, creates corporatism.

But Average Joe who incorporates his business does not get handouts from the government. That is the corporatists who do.

You don't seem to be able to distinguish between the concept of limited liability, which is a net benefit to the economy, on the one hand, and big government special favors to SOME (a small percentage) of corporations on the other hand.

So, it is logical to find out first of someone who is coming from your perspective is pro-capitalist or anti-capitalist first. Then, the next question becomes whether you can distinguish between capitalism and corporatism (because you seem to be mixing the two).

wolfe's picture

No, I have not mixed them.

You are confused. Don't worry though, education can cure that.

Capitalism = Business/Markets
Corporatism/Fascism = Government Interference with business/markets.

A corporation receives a number of boons from the government including limited liability, limited risk (in terms of criminal prosecution), default contracts, etc.

The fact that these boons cannot exist without government, alone proves my point. The results of the moral hazards produced by them, further solidify it.

And yes, even the smallest corps receive these benefits.

The Philosophy Of Liberty -

You are just plain wrong about ALL liability

You said: "A corporation receives a number of boons from the government including limited liability, limited risk (in terms of criminal prosecution), default contracts, etc."

And: "And yes, even the smallest corps receive these benefits."

Those protections apply ONLY if the individual(s) in question operated in GOOD FAITH (i.e. did not commit a tort, such a fraud or neglegence, etc.).

Here is a good article on the subject:
"Many times, a properly formed and maintained business entity, like an LLC or corporation, can provide a shield or "veil" of protection for an individual member or officer. However, the protection is not absolute, and there are many instances where you can be personally liable in business despite the formation and operation of a business entity. Two of the most common methods of establishing personal liability are "piercing the corporate veil" and individual responsibility for torts, such as breach of fiduciary duty, negligence, fraud, and misrepresentation."


The BIG BUSINESS guys (whether incorporated or not) get away with things because they are POLITICALLY CONNECTED. For everyone else, officers and directors can go to jail, as did some of the guys in Enron.

Hell, the Sandy Hook thing shows that Peter Lanza's division at General Electric had a few people going to JAIL.

How would that be possible if your theory were true?

wolfe's picture

The only thing that people go to jail for in the corporate world

Is basically defrauding investors.

Shall I cite the many examples of corporate liability that results in death(also known as murder and manslaughter), where not only were their not any criminal prosecutions, but not even an attempt to find those responsible for the decisions?

Seriously, the list is so lengthy, I find it almost impossible to believe that you are that naive.

The Philosophy Of Liberty -

You didn't even bother to read that short article ...

... where it was a homeowner suing an LLC and its owner (the owner of the contracting company) over poor workmanship. It had NOTHING to do with "defrauding investors" because it was against the owner/investor himself.

"Although the Supreme Court ultimately found that there were insufficient facts alleged in the complaint to establish the negligence claim against Mr. Harb personally, the Court rejected the argument that Mr. Harb could not be personally liable for negligence merely because he was a member of an LLC."

And ...

"The Supreme Court noted that Connecticut's common law provides for personal liability of officers of a corporation for torts personally committed (such as negligence) that injure third parties provided the injured party can show a legal duty, breach of that duty, causation, and damages. As such, if an officer of a corporation commits a tort in business, the officer may be personally liable even if the corporation is also responsible."

But sure go ahead and cite some cases that back up your position. Seriously, though, I have just cited a state supreme court as the COMMON LAW is applied. Sure, you can find some cases where there was investor fraud, but you can find cases of torts, too, and that proves your position is wrong.

I'd like to think we are mostly on the same side. But I am hitting this investor liability hard because it is a vital component of a society.

Even in an anarcho-capitalist society, there would be "dispute resolution organizations" that would act as courts. There would be contracts. And you can bet your sweet a** that investors in someone else's business enterprise would be wanting limited liability.

wolfe's picture

In your case, it was a punitive monetary award.

Which was my point. It is possible to pierce the corporate veil, and an LLC isn't a corp. This is done by proving that the owner mixed personal affairs with that of the business, or set out with bad intent, personally. That has no bearing on the discussion. Just because it can be pierced in limited circumstances doesn't make it ok.

However, you did not prove that anyone was held criminally responsible.

If you watched the documentary (clearly you did not), they actually cite a number of them. I will do a quick google and paste in a handful of ones that pop up. I am personally aware of many, but those aren't likely to be the ones to pop up (because there are SO many) and would rather give you some stuff to read.

Seriously, the fact that I have to do this google to prove something that is in the news almost everyday, just disturbs me a bit.

Some of the list on their is silly (guns), but most are valid. And prove that without real direct, individual intent, the companies can pretty much get away with murder as the cost of doing business. They are willing to do this because the cost/benefit tells them it is ok.



I can go find more, or you can watch the references in the documentary.

Even if/when they get held responsible for their actions, no one will go to jail. Their will be a fine, and life will go on.

Most people would call this manslaughter or negligent homicide:

They call it an unfortunate blunder and life goes on.

Bayer killed how many?

Oh, that sucks... Had to pay some cash again. Most people would consider this a case of First Degree Murder.

The Philosophy Of Liberty -

Sorry to interject

but I couldn't help myself. It may not be an exact "corporation gets away again" situation but the GOP in florida just avoided a messy trial whereby numerous upstanding, highly moral politicians were not 'embarrassed'!


Not only that, I don't think the actual crime (money laundering) is even going to be stopped.

wolfe's picture

To Velveeta Underground:

There was a request by someone for us to continue the discussion on the front page, and I wanted to respond to being opposed to corporatism.

Corporatism is a natural by product of corporations. The government based interference in the business model creates a moral hazard which causes corporations to act and behave in a manner inconsistent with good business. They are not subject to the "natural laws of the market" because they are allowed to exist without being effected by the natural risks involved in ordinary business.

It took me a while to drop my defense of corporations because I personally fell for the line of propaganda that teaches that we wouldn't have business without corporations, as well.

Business is a by product of people interacting with one another in a healthy way. Exchanging goods and services with one another so that both parties may benefit. That is business.

So long as goods and services are needed, business will exist, because it simply must. Some of our largest companies are cosmetics. So suppose for a minute, that the market were not artificially controlled by the government, and the corporations were unable to grow to the size that they are today, allowing complete domination by just a few companies of the market.

Smaller producers would pop up, and their business would only grow so far as they felt comfortable with the risk. I make cold process soap (hobby), but, if people needed soap, my hobby might become my business. There are many people who know how to make soap and other cosmetic goods. There would be far more, probably far smaller businesses, that behaved in a healthier way in the business world, if the corporate structure was not created by the government.

Hence, more businesses, and less corporate slaves.

And, I really do highly recommend this movie. It is not anti-business. It is anti-corporation.

The Philosophy Of Liberty -

Is the soap you make ...

... cheaper than what someone can get from a bigger company?

If not, then you are asking your customers to spend more on your product than what someone else can offer them, and you are asking them to then have less money to spend on other goods and services.

Why should they do that?

wolfe's picture


On so many levels.

First of all, yes, making soap is much cheaper than buying it. And is of superior quality.

Second, if a company is using externalities to artificially reduce their cost, then the product only appears cheaper but is in fact not.

I could make a really cheap product by using slave labor, and whipping people to the point of death. But it is only cheap because I am stealing other peoples lives, which means it isn't cheaper, I am simply transferring a portion of the cost.

The market drives prices. Competition is good. Your argument seems to be that having large companies and less market competition somehow creates a better price or product? You do realize that is in direct contradiction to all of our general beliefs about markets and competition.

It's amazing how the pro-corp folks get this blind spot.

The Philosophy Of Liberty -

Don 't evade my question

I did not ask if *making* soap is cheaper than buying it.

I asked if YOU can *sell* YOUR soap to customers at a price that is CHEAPER than other companies.

If you cannot, then you MUST have something ELSE you can point to that your customers will perceive as BETTER VALUE than the other guys.

I assume you cannot, which is why you must claim that others are using "slave labor." Maybe they are, or maybe they are using labor that gets paid less money because they are in an economy that gets paid less money.

If you can prove it, then that could be a reason for people to buy from you instead of someone else. That could be what it takes to get enough business to turn it from a hobby to a business.

But that is not happening. Why are you unable to make your case to enough people to where they choose your product over someone else's?

If the reason is because the market is not big enough for the product you want to make, then tough sh*t. Most businesses fail.

OTOH, if the reason you can't get more sales is because some government employees are conspiring with the bigger soap makers to make their product seem like a BETTER VALUE, despite any allegations you might make, then I will agree with you that you are getting ripped.

BUT ... that is corporatism that is ONLY possible due to BIG GOVERNMENT.

Tell ya what. Let's try an experiment. You go out and form a corporation with your state for your soap business.

Then, let's sit back and see all the privileges that get thrown at you. You won't get any. And that's because it is NOT the incorporating that does it. It is the crony corporatism by those who are POLITICALLY CONNECTED that does it.

wolfe's picture

I answered your question.

It is cheaper, by a magnitude of difference.

It is a hobby, not a business. I have many more lucrative business ventures.

You did not address any of what I said. You just stated more diversionary what-if crap that is meaningless.

Corporations, by their very nature, even at it's smallest possible size of 1 individual takes advantage of government interference in their market. Period. The larger a corporation becomes, the more capable it is of taking advantage of more. But whether they are stealing $1 or $1M, it amounts to the same thing.

So you are ok with a little corporatism, just not a lot, eh?

The Philosophy Of Liberty -

it's really plain and simple

There was never one corporation that fought and died in the American Revolution.
Not one Corporation signed the Declaration of Independence ,therefore a Corporation is a lower entity then sovereign American citizen.

Therefore corporations should never be given constitutional rights.

Google "corporate personhood"

Google "corporate personhood" and carefully examine the Wikipedia entry or look up a detailed legal definition. You are taking the word "person" far too literally and simply to apply in this matter.

wolfe's picture

The laws of the United States

The laws of the United States hold that a legal entity (like a corporation or non-profit organization) shall be treated under the law as a person except when otherwise noted.

So does that mean a corporation can be sent to jail? Nope. Punitive damages, which creates a cost/benefit analysis performed by corporations on peoples lives, health, and property damage, as opposed to real criminal penalties.

Only people can take true responsibility for their actions, both good and bad.

I encountered a very real situation personally a while back (years ago). My girlfriend at the time needed a hobby, and it was right before ecigs became more commonplace. I decided opening up an ecig distribution would be an excellent hobby for her, and may even make some money.

So I did some cursory research, selected a manufacturer and issued an order for 5000 units. Well, in the meantime, my sample from the manufacturer caught fire while plugged in. It was likely due to me accidentally using the wrong charger, so user error.

I was not willing to go through the hassle of setting up a separate corp/LLC, and dealing with potential lawsuits, and possibly causing someone to get hurt, for a "hobby" for my girlfriend. Nor was I willing to do the legitimate research required to insure a completely safe product, since I simply didn't have time/expertise.

So I decided against it, and was able to cancel my order before it shipped, and the company was understanding enough to refund my full payment.

Personal responsibility is a requirement for good business. The "limited liability" protections are a moral hazard which lets people behave badly in business. My decision was the right one. But if I had been a different kind of person, I would have potentially taken the time to protect my assets, and made the wrong decision by providing a potentially dangerous product, knowing that the profit came without real risk.

The Philosophy Of Liberty -

Question: Where does the risk go?

So I've been trying to follow the confusing layers of debate about this issue, and, must admit getting lost. I've never incorporated, not been in any way personally involved with corporate structure. But I've been trying to understand the fundamentals as part of understanding how I will fall on related political issues.

I hope some of you who have been involved in this debate will help me out here.

I'd like to understand where the risk goes.

If part of the attraction of corporate status (in whatever/all forms) is limited liability, where does the avoided risk/liability go?

It doesn't disappear, right? It lands somewhere.

I would very much appreciate some insight into where you all perceive the risk lands with each form of corporation?

I think I get the libertarian utopian corporation risk landing pad. The risk lands only with the creditors who agreed to a limit on what they can get back. Just the same as my home loan; the bank can take my home and nothing more.

I don't get the risk landing pad for the actual types of corporations that exist now. Who takes up the avoided risk? Or, maybe, there's a legitimate argument that no one does? Or maybe there's a good argument that the risk is absorbed by the positive extranalities?

Help me out here.

When we are talking about limited liability ...

... we are ultimately talking about lawsuits, court cases, and what rights can or cannot be pursued through court.

Let's take an example. Some guy, let's call him Barry, goes into business as a sole proprietor. His business is manufacturing fake birth certificates. It's a good biz. Barry does some business with Hugo, who wants some fake stuff made up for his biz down in Venezuela. But since Hugo rigged the currency exchange, Barry and Hugo have a contract dispute. Hard to tell whose fault it is, but Hugo sues.

Since Barry is a sole proprietor, Hugo sues Barry personally, in Barry's own name (or one of his several alias names).

Anyhoo ...

If Hugo wins a court judgement, it is against Barry personally, and Hugo can now foreclose on Barry's house, car, skeet guns, whatever Barry owns. It is a PERSONAL judgement against Barry.

But if Barry first incorporated his business, let's call it Indonesian Trinkets, Inc. ("ITI" for short), then Barry did not "do business with" Hugo. Instead, ITI did business with Hugo. So, Hugo has to sue ITI, not Barry. If Hugo gets a judgement against ITI, he cannot go after Barry's stuff (which is all held in trust, anyway, but that's another can of worms). Hugo is LIMITED to going after ITI's stuff, which might be a lot or a little.

Now, let's say that Barry wants to borrow some money for a fake house purchase (never mind that the seller is really paying a bribe, but that's another story) ... and so Barry goes to the bank to get a loan.

But the big, bad, mean banker doesn't think ITI, the corporation, is good for the money. So, the bank makes Barry co-sign for the corporation. In this way, BOTH the owner/officer of the corporation and the corporation itself are held liable.

If something goes wrong, the banker can sue BOTH the corporation and Barry. So you see, the corporate limited liability can be "over-ridden" by contract, and often is when it comes to small business.

Now, let's say Barry wants to grow his business and he wants to bring in investors. He wants YOU to be his investor. In case you haven't noticed, Barry has a nasty habit of TELLING you what he wants, not asking you. So, you ARE his new investor.

If Barry's biz is a sole-proprietorship, it now becomes a partnership, since there are two owners. And BOTH of you are now liable for what the business does -- or what either partner does on behalf of the business.

Do YOU want to be Barry's biz partner if something goes wrong? If you are, then YOU can be sued, along with Barry and the biz itself.

However, if it is a corporation, then you can give money to the corporation by purchasing stock. In that case, YOUR liability is limited to the assets of the corporation, and creditors cannot come after YOUR assets.

So, the liability "goes" to the creditors. They extend credit and do business with the corporation WITH THE UNDERSTANDING that their legal rights are limited as to recovery for damages if something goes wrong -- UNLESS they otherwise agree by co-signing in their individual capacities.

If there was no way to limit liability to investors, then there would be NOBODY who wanted to take the chance if losing EVERYTHING if something went wrong with a company that they had invested in. NOBODY would do that.

That is the reason for limited liability.

Now, when you see these reports of people in BIG BUSINESS getting away with crimes, it is NOT BECAUSE OF CORPORATE LIMITED LIABILITY. It is because these people are POLITICALLY CONNECTED, as individuals, and/or because they run VERY big companies that are part of the cronyism network.

It is these political favors that are the problem, not limited liability for investors.

Thank you, TommyPaine, for

Thank you, TommyPaine, for attempting to help me get this. If you don't mind, I'm going to try to understand your response by argument.

Your first statement is pretty much the question I asked. I think I understand the risks that can be pursued legally; I'm interested in the risks that perhaps CANNOT be addressed through the justice system.

I'll skip the sole proprietorship and partnership stuff, as those aren't the business structures I'm concerned with here, and I think I get the broad strokes of risk dispersment on these fronts.

I also get the notion that a business that has gained permission to be incorporated under a state legal code, may be able to make loan agreements with lenders who are not willing to accept liability limited to the corporation's assets and require the corporation's owners to be personally liable. I don't see a potential for spreading risk for this scenario. I could be missing something, but this seems like a private one-to-one agreement, in which each party assumes the totality of risk for failure to comply.

In your next example, you move to a publicly traded stock. As I understand it, all publicly traded companies are corporations -- although I could be wrong. Certainly the majority of publicly traded companies are corporations. A person who buys a stock, buys it on the assurance that he can only lose his investment (plus brokerage fees). He knows that even purchasing stock in a corporation he knows is involved in illegal business, he won't be liable. That's the benefit. Both to that stock buyer, who gets to invest with limited risk, AND to the corporation, which gets to lure capital with that assurance of zero down side beyond their opportunity risk.

As I understand it, you're saying that the risk goes entirely to the corporation's creditors. But what about the other publicly traded companies, which aren't involved in corrupt practices? It may well be that their stock is rated lower, due to the lessor returns their companies are posting.

Could it not be argued that the stock purchaser, who's so protected, has little interest in ferreting out lower risk -- i.e. more scrupulous corporations -- and lower yield publicly traded companies? Could we not argue that the risk is transferred to scrupulous corporations, who pay the price of being less able to attract large stockholder investment because of their inability to compete with unscrupulous Barry?

Could we not say that withholding the risk associated with capital investment -- even in its lowest form of buying a stock -- skews investment decisions? Would not such skewing of investment decisions -- such skewing of risk -- land on the market as a whole? Does not an unscrupulous company, willing to go Barry, pervert capital (average stock buyers) away from more productive investment?

Is there an argument to be made that removing intrusive risk from investors, shifts the risk to the productive economy as a whole?

As for your assertion that NOBODY would be willing to risk the entirety of his assets. We know that's not true. Many nobody's risked everything to go exploring, to go west, to go to the gold fields. Some of those risk takers got rich. Most didn't. They made their judgments of risk and succeeded or failed. You do understand that hundreds of thousands of Americans left everything for a promise of gold -- in Montana, in California, in Alaska. None of them required the protection of limited liability. These people did not in transfer risk.

By contrast, your every bodies, who are unwilling to risk more than their initial investments, must -- by definition -- be transferring the risk somewhere.

How does the corporate structure allow that risk to be transferred? What part of that transfer is a drag on our economy and on our cultural zeitgeist?

I'm not quite sure what your question(s) is(are), but ...

... I'll take a shot. Seems like you are mixing a few concepts together and I think we should separate them out for clarity.

First off, not ALL corporations are publicly owned. MOST are privately owned. The idea of a corporation is to limit the liability of the shareholders. It is a default position in the COURTS, when lawsuits are in question.

If someone does business as ABC Supply, then they are most likely not incorporated. However, if they do business as ABC Supply, Inc., then that is YOUR notification (notification to the general public) that if you do business with them, you are agreeing to limit your liability to the assets of the corporation if you have a dispute that winds up IN COURT.

Most corporations are formed by Average Joe to do business with some protection of limited liability so that his personal assets are not at risk in the event of a business dispute that winds up in COURT.

Now, if someone wants to not only file paperwork to incorporate but ALSO file paperwork with the SEC to be a PUBLIC company, then that is a company where the general public (you and me) can buy stock through a broker (or directly with the company, in some cases).

So, most corporation are privately owned, and stock cannot be bought and sold by the general public. A small percentage of corporations file additional paperwork to become publicly owned.

Moving on, you said, "He knows that even purchasing stock in a corporation he knows is involved in illegal business, he won't be liable."

Now, THIS is where we got a problem, you and me. I think you will be hard-pressed to find a company that is soliciting investors where everybody involved KNOWS they are involved in an illegal business. If somebody wants to get investors for his moonshine business, everybody knows they have to keep it QUIET. They sure as hell are NOT going to "go public." If they did go public, the founders would have to LIE to get listed, and so the investors would NOT know they were really involved in illegal activity. If everybody did know, they would probably be a SMALL group of people, and they would use CASH, and they would NOT INCORPORATE. Why bother when you are involved in something illegal?

So, your scenario is not realistic. Now, that does not mean that NO corporate executives do things that are illegal. Remember Enron? There are former executives of Enron who went to PRISON who did dirty deeds for Enron. One committed suicide to avoid prison. But the investors didn't know the execs were cooking the books. The investors thought it was a legit utility company.

Also, you are leaving out the "investors" who short stocks. Right now, there is a hedge fund manager who is massively short Herbalife because he claims it is a pyramid scheme (and, therefore illegal). But guess what? The regulators, who certainly know the allegations -- he has been VERY public about it -- are doing nothing, or they disagree that it is illegal.

If he is right, the company will eventually fail, and he will make a lot of money. But there are other investors who think he is wrong and they are buying the stock. The stock price is HIGHER since he started shorting and went public with his accusations.

So, who is right and who is wrong? Time will tell. But this risk of higher/lower stock prices is ONLY LIMITED to those participants who want to take one side or the other. The risk (risk of the market price of stock) does NOT affect you or me. The market will flush it out. Either money will go from the longs' pockets to the shorts' pockets, or from the shorts' pockets to the longs' pockets.

That's what makes a market. There are no guarantees. But the market price risk is dealt with by the marketplace.

Now, let's say Herbalife goes bankrupt. The shorts will make huge profits. The longs will lose their entire investment. The banks who loaned money will lose their investment in the loan, and vendors who supply the company will lose anything they have tied up in it.

But that is factored in to business. Banks KNOW that some loans will go bad, and that is priced into what they charge for making loans. Same goes for suppliers. In fact, if Herbalife were to start missing payments, the suppliers would stop issuing credit, and would insist on cash on delivery to limit their risk.

The marketplace works it out. To the extent that it "spreads," all those potential losses are factored into the cost of doing business, generally.

Now, if you were to ADD to the overall risks the idea that investors would be 100% liable, then the markets would DRY UP. Investors would NOT invest and risk everything.

The examples you cite of the gold miners are people who were working for THEMSELVES going out to pan for gold. There were no creditors or customers. You paid CASH for tools, paid CASH to stake a claim, and went out digging. If you came up with some gold, you sold it for CASH, hoping for a profit.

The bigger operations that hired people and borrowed from banks and paid for big claims, those were companies that incorporated or used business trusts. In fact, there are collectors today who buy and sell old gold mining company stock certificates as collectable items (the companies went bankrupt long ago, but there is value to collectors who think they are cool). Those are STOCK certificates of CORPORATIONS who were in the MINING business in the 19th Century.

I hope that answers your question(s).


Again, thank you

I'm going to try to get to the crux of my question better.

Your argument for corporate structures seems to rest primarily on the assertion that no one (but, let's say "few" people -- too few people -- because we know that such extremes are typically unsupportable) would invest, whether privately of through publicly traded stocks if they were not assured that their downside would only extend to the amount of their investment.

Your argument takes as a given that the risk to such investment extends beyond the money an investor puts up. My question is: where does that extended risk go once the the investor is not responsible for it through the corporate structure?

I don't think you can have it both ways by asserting that the risk is too great without legal corporate status to lure enough capital and then saying, as I'm reading your argument, that the risk only goes to creditors. Are you saying that only the corporations creditors are absorbing the risk avoided by investors?

As I'm pondering this, I'm thinking it could be true that creditors absorb some of the risk. But does it not follow that other borrowers from those creditors then absorb the risk in terms of higher interest rates?

But creditors, presumably, assess those risks fairly well. I doubt they're taking up the majority of risk avoided by investors in such corporate structures. You say that the marketplace spreads the risk out. To whom? Why is this good for productive, efficient allocation of capital?

My investment club purchased Enron just a few weeks before its crash. At the meeting during which we voted to buy, I remember trying to figure out how this business actually made money. They just seemed like a go-between, a facilitor. I remember asking the other club members how a business that seemed to be simply playing the roll of auctioneer could be posting such high returns. Non of us knew, but we were using a matrix that was all about the numbers. We bought. We lost, but only our investment and our opportunity costs. Did someone(s) else pay the cost for our stupid -- and limited liability -- investment? Would we have been more cautious and responsible if we knew we could lose more than our investment?

Ask BP

Go ask BP who is paying the external costs of the misplaced risk that they avoided. It's FEMA, many other US federal departments, state and local entities and the remaining portion was left to those suffering loss. This is because oil gets many subsidies, one large one being mining/drilling rights without full insurance requirements.

Want a better example? Look at the nuclear industry. Without the government insurance on that industry, nuclear sourced electricity would be more than double it's already 'higher than any other' price. As it stands now, they pay 1.2 cents/kWh which is about 1/10th of the sales price.

Just look at all the major man-made catastrophes. Love canal, TMI, Valdez, Enron, falling bridges, Fanny & Freddy, derivatives, the 2003 N.E. power grid outage and so on. Companies only pay what they can afford to lose without hurting their bottom line. All these were caused by documented neglect by one or more people and previously known by many others. Only one went to jail from the entire list.

Others will tell you that there "may" be the possibility of them going to jail and while you can see that is true, you can also see how that's working out. In short, when you bribe the regulators to make the rules in favor of your business practices, whatever you do becomes legal, regardless of right or wrong. The best example I can think of is: Did you know it's legal for one financial company to steal (borrow) shares from another one without notifying them, bet on them, return them at the original price and keep the profit? Replace "shares" with "cars" sometime and see how that goes.