I will pinch hit for Tyler on a few questions of interest to readers beginning with, "What's up with limited liability corporations?" A common libertarian argument is that groups do not possess rights beyond those of individuals. If it is wrong for A, B and C to steal from D then it is wrong for A, B and C to call themselves a government and tax D. Similarly, we might ask if A, B and C must pay for any injuries that they negligently cause D then how can they justly combine together to form a corporation and limit their liability? For this reason a consistent libertarian like Murray Rothbard rejects limited liability in tort as illegitimate. (Critics of limited liability from the left, however, do not seem to carry their argument over to taxation.)
Do note that limited liability in tort is the crux. Limited liability of shareholders to creditors is innocuous because this is just a matter of contract and regardless of the default law can be modified.
The economic argument against limited liability (JSTOR) is that it socializes risk. But many people on both the right and the left think that limited liability is the acme of capitalism (see the extension for some quotes) without which capital markets would fall apart - thus at least some people think limited liability is important and necessary.
Empirical research, however, indicates that limited liability is just not that big a deal. British firms had unlimited liability until 1855, California firms had unlimited liability until 1931, banks had double liability until the 1930s and American Express had unlimited liability until 1965. None of this seemed to matter very much.
One reason why unlimited liability may not matter very much is that most of the time capital more than covers tort risk so unlimited liability is usually moot. Insurance requirements, Basel-like capital requirements and other such laws cover externality problems when this is not the case. Most of the time we are not on the bubble where tort does pay and even on the bubble managers can be found criminally liable for truly egregious torts.
Even in an enhanced tort risk environment unlimited liability may not be worth the candle because it can be gamed - assets can be shuffled around to judgment proof investors, and firms can decentralize.
Unlimited liability also raises transaction costs. In a joint and several regime, for example, Bill Gates would be liable for all tort expenditures simply by owning one share of a corporation - that makes Bill Gates less likely to invest and more concerned with who else owns shares in the corporation. And which shareholders should pay, the ones who own the stock when the tort claim is brought or the ones who owned the shares when the tort happened? These problems can be solved but is it worth the hassle?
In my view, the bottom line is that limited liability lowers transaction costs and has few negative effects in part because torts usually do not bankrupt firms and other institutions (such as insurance) substitute for unlimited liability and in part because the advantages of unlimited liability would mostly be gamed away in anycase.
Addendum: Bainbridge has more.
“The limited liability corporation is the greatest single discovery of modern times. Even steam and electricity are less important than the limited liability company”.
Professor Butler President of Columbia University, 1911.
"This limited liability corporation is the bedrock of the market economy…And what do we, the citizenry, get in return for this generous public grant of limited liability? Originally, we told the corporation what to do. You are to deliver the goods and then go out of business. And then let humans live our lives. But corporations gained power, broke through democratic controls, and now roam around the world inflicting unspeakable damage on the earth."
Russell Mokhiber and Robert Weissman, Mother Jones 1999