Comment: When we are talking about limited liability ...

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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.