Re: Corporate liability (WAS: Environmentalism in a Free society)

The Baileys (
Sun, 10 Jan 1999 08:46:30 -0500

Peter C. McCluskey wrote:

> For example, if a company that pays out a
>dividend which later turns out to cause it to default on a debt,
>can be liable (I suspect up to the amount of the dividend).

Generally, shareholder liability is capped to equity investment.

I did not see the initial points in this argument but limited liability is a hallmark of the corporate form. There are significant disadvantages to the corporate form to partially balance this limited liability advantage. The most significant is double taxation on corporate earnings. Corporations (at least under subchapter C) are taxed on their taxable income and shareholders are taxed on dividends distributed by the corporation. In most situations this state of affairs amounts to an effective tax rate of 61% on corporate earnings.

Additionally, the corporate form is not a device for committing crimes and avoiding responsibility. The corporate form allows for a large number of investors to combine their capital without the fear of significant vicarious liability for the actions of the group or of individual shareholders. If a corporation is found to be a device to perpetrate crime then the corporate veil will be pierced. In closely held corporations (corporations with a few large shareholders), the corporate veil is often pierced when a minimally-capitalized corporation incurs signficant liability. This is the hallmark feature of limited liability entities. The firm I work for is a limited liability partnership. This choice is not designed to allow partners of the firm to avoid liability. Instead, it is a choice that allows only the partners responsible for a situation where the firm incurs signficant liability to be liable for those sums. I certainly do not want to become liable for what a less-than-scrupulous partner in Mauritius decides to do.

Doug Bailey