Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : View from the Center and Left -- Ignore unavailable to you. Want to Upgrade?

To: TimF who wrote (11098)	2/10/2006 3:00:38 AM
From: wonk	Read Replies (1) \| Respond to of 541791

The liability is fully owned by the corporation. I don't consider the fact that the investors can avoid liability to be a benefit provided by the government. Sorry for getting back so late, but there is an important point here. The Government did create a benefit, and the value of that benefit is extracted from individual citizens and small business owners (Labor) and transferred to Capital (the investing class). You can make the argument that it is necessarily efficient and is necessary to promote the “general welfare” – but then by doing so you eviscerate the philosophical underpinning for the position that the Government shouldn’t interfere in the “free market. ” Lets start with the basics: wireless wonk engages Tim Fowler to prepare my taxes. wireless wonk fails to pay. Tim may recover his claim from wireless wonk. wireless wonk, d/b/a, Wonk Company ( a sole proprietorship) hires Tim Fowler to prepare its taxes. Wonk Company fails to pay. Tim may recover his claim from wireless wonk because Wonk Company is a sole proprietorship. Wonk Corporation (wholly–owned by wireless-wonk), hires Tim Fowler to prepare its taxes. Wonk Corporation fails to pay. Tim has claim against the Wonk Corporation but not me personally, even if I’m the sole owner of the equity. If the company has no assets – you cannot recover a cent from me. You get nothing. The only difference is that the Government (the States actually) – via legislation – has created a business form which - by definition –shields the owner(s), whether 1, 1000 or a million, from the debts of the business. The government took away Tim Fowler’s RIGHT to recover from me personally - for my debt. Yes the Government permits LLC and Corps for all the fine benefits and efficiency gains you mentioned. But by taking away your rights – the government gave me a benefit. If each State tomorrow was to eliminate limited liability from Corporations, LLCs, LLPs etc, Corporations wouldn’t go away and if you wish to argue they would, then the limited liability feature would be proved to have real value. Modern Corporate Finance tells us this would - theoretically - happen: 1. The cost of equity capital to each individual company would go up; 2. The cost of debt to each individual company would go down; 3. The weighted average cost of capital by Company would probably go up, but by a modest amount; 4. The aggregate return on equity for all larger business would go down (higher returns demanded by equity investor would be offset by equity losses and the requirement to make recompense for the total liabilities of failed Companies); 5. For existing small business and sole proprietorships, their weighted average cost of capital would go down and their return on equity would go up. (Because as lenders had either fewer bad loans or recovered more on bad loans from failed big business they could lower their lending rates to smaller sole proprietorships.) Consumer lending rates would also fall because consumer loans rates are not only a function of the specifics of the credit decision to a specific borrower, but also the required margin the lender needs to earn such that the overall Company’s basket of loans achieves minimum rates of return. 6. In the aggregate for the US, allowance for bad debts as a percentage of revenue would go down resulting in higher gross margins and higher income before tax resulting in greater tax remittances to the government. So, all things being equal, limited liability is an enforced government taking from lenders, sole proprietorships and individuals to investors (Capital) that use these forms. Perverse, isn’t it? Now in this day and age it really wouldn’t work that way, because everyone else in the world also has limited liability. If you got rid of it, you’d hear Ross Perot’s apocryphal “giant sucking sound” as equity capital fled the United States. Then using simply supply and demand curves, as the quantified supplied of equity capital shifted, the equilibrium point for cost of equity would settle at a much higher point. So, because limited liability DOES confer a benefit AND because – from a practical perspective - it would be suicide to eliminate it, government has the right and duty to impose conditions on businesses that use these forms that promote the overall societal welfare. Circling back to my initial point, it is responsible public policy. …As a result their "limited" potential losses cannot exceed the amount which they contributed to the corporation as dues or paid for shares. This allows corporations to raise funds for riskier enterprises by removing risks and costs from the owners and by shifting them onto creditors and to other members of society, thereby creating an externality. en.wikipedia.org ww ”…I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country…." Thomas Jefferson