Corporate Personhood, Limited Liability, and Double Taxation


by Stephan Kinsella
http://libertarianstandard.com/2011/10/18/corporate-personhood-limited-liability-and-double-taxation/

Note: I don’t accept Stephan’s argument against joint and several liability of shareholders if a corporation cannot pay damages awarded against it for torts. In the first place, some kind of vicarious liability is perfectly just – perhaps not the full degree seen in the common law. In the second, Stephan seems to regard shareholders as similar to citizens in a democratic state. There is no similarity. Stephan and I cannot reasonably be held responsible for what was done in Iraq. We opposed it. We may have voted against it in various elections. But we are members of compelled associations. We could not opt out. A shareholder, on the other hand, is a member of a voluntary association. It is up to him to keep an eye on what his servants or agents are doing. If he cannot control them, he should think twice before buying or keeping his shares.

Corporate Personhood, Limited Liability, and Double Taxation

by Stephan Kinsella on October 18, 2011 @ 2:56 pm · 65 comments

in Anti-Statism, Business, Corporatism, Libertarian Theory

The politics of the left-oriented Occupy Wall Street (OWS) movement, like that of the right-oriented modern Tea Party movement, is not very well defined. But one of the things some of the OWS participants are calling for in their list of “demands” is an end to “corporate personhood.” In this they echo the views of left-libertarians who contend that state-chartered “corporations” are the source of grave social ills.1

Some of these issues were recently debated on the pages of Roderick Long’s blog, in the comments to his post “Double Standard.” Left-libertarians who oppose incorporation, and usually also “capitalism,” argue that firms derive some great benefit from the state by the privilege of incorporation. The standard leftist critique of the corporation is the “concession” theory outlined by Robert Hessen in his seminal study In Defense of the Corporation (see a key excerpt from pp. 18-21). They argue that the state grants to corporations three features: entity status, perpetual duration, and limited liability to shareholders, all of which are artificial and would not exist absent state intervention. Left-libertarians maintain that these privileges grant corporations more power than they otherwise would have, which distorts the market, nay, society in general. This gives rise to more “hierarchy” and “authoritarianism” than would prevail in what Hans-Hermann Hoppe calls a private law society, and indeed, to “exploitation” of the workers by the bourgeoisie.

The Alleged “Privileges” of Incorporation

Labor Theory of Value

There are several problems with the left-libertarian and leftist critiques of corporations. One is the acceptance of a Marxian-type labor theory of value—the idea that employers per se “steal” or exploit from workers the “social surplus product”—a discredited, hoary, unscientific view based on deeply flawed economics.

Entity Status

And as Hessen has pointed out, each of the three corporate features pointed to as a state-granted privilege—entity status, perpetual duration, and limited liability for shareholders—can be created purely by private contract. As for entity status (being able to represent the firm in lawsuits or for property ownership purposes, in the firm’s name) this is just a convenient legal fiction that could be created by means of trustees, or other contractual techniques (including agreements with private defense agencies, insurance companies, arbitral agencies, and the like). In any case, even stripped of this procedural convenience, firms could still organize themselves as joint stock companies or “corporations”.

Perpetual Duration

Hessen also easily disposes of the myth that perpetual duration is a privilege granted by the state; this can be achieved easily by means of continuity agreements and the like.

Limited Liability

The big objection to corporations is usually limited liability for shareholders. Now first let me mention that many non-attorney critics of this notion seem confused about what it means (and many attorneys also misapprehend it). They think the doctrine insulates a tortfeasor from liability even if he was negligent, so long as he is a shareholder. Or that the doctrine exempts managers and officers of the corporation from liability for torts of others. They are wrong. The doctrine merely says that shareholders are not jointly and severally liable for all the debts of the company that they have a share in. If a company that A owns shares in is sued and driven to bankruptcy, A loses the value of his shares but is not personally liable for the lawsuit against the company. (N.b.: to the extent some state incorporation statutes also limit the liability of managers for torts of the corporation, and not just that of passive shareholders, this is another matter and is more objectionable. However, the primary purpose of limited liability laws is to protect the shareholders from general liability; and in any case, officers and directors are routinely protected from any personal liability by the use of D&O insurance.)

Second, we have to distinguish here between contractual debts, and debts arising from torts (or even intentional crimes). As for the former, this is easy to dispatch: someone loaning money to, extending credit to, or engaging in a contract with a corporation is implicitly agreeing to pursue only the assets of the corporation itself in case of a claim, not the personal assets of shareholders (unless it insists on some shareholders personally guaranteeing a loan or contract, as if often the case for smaller companies).

So what about torts? The typical example is a truck driver for a company who negligently harms an innocent third party. The third party has no contract with the firm, unlike in the case of contractual debts noted above. The opponent of corporations maintains that the victim should be able to sue not only the employee-tortfeasor, and the corporation itself (to go after its assets and deep pockets, including its insurance policies), but shareholders themselves. After all, they are the “owners,” and should be liable too. Right? And thus, state limited liability provisions are short-circuiting the liability that shareholders would normally have. This lowers the cost faced by corporations; it makes shareholders less responsible in their decisions about who they elect for the firm’s board of directors; it lets the firm externalize costs onto the market.

The problem with this theory is the assumption that in a private law society, “shareholders” should be vicariously liable for the negligence of others. There is, in fact, no libertarian justification for this view, as libertarian theorists such as Robert Hessen, Murray Rothbard, and Roger Pilon have argued.2 In this situation, some employee of a firm has committed some tort—a negligent act (such as a FedEx truck driver negligently crashing into some victim). Here the victim has a right to sue the negligent employee-tortfeasor. The question is: Who else’s assets can the victim go after? Can he sue the managers, or the directors, or go after corporate assets, or sue shareholders?

We have to recognize that the prima facie answer—the default condition—is no: each person is responsible only for his own torts, not for those of others. To hold someone else liable requires some kind of “vicarious liability” theory. To do this, you need a theory of causation and responsibility, which Pat Tinsley and I have tried to sketch out in Causation and Aggression. Yes, you can be jointly responsible with the actions of others if you engage with them in cooperative action to cause the illicit result: for example co-conspirators in crime, a gang of bank-robbers, and so on.

But holding employers—or shareholders—vicariously liable for actions of their employees relies on the offensive, paternalistic, feudalistic concept of respondeat superior—a master is responsible for his slaves’ or servants’ transgressions. As Hessen notes, this is just a vestige of the medieval mentality. Why would a shareholder be liable for actions of some employee? There are two aspects to being a shareholder that could conceivably give rise to vicarious liability for another’s direction actions. First, the shareholder may have contributed capital (money) to the firm. On the other hand, he may not have: he may have bought the share from a previous shareholder. This latter possibility is routinely overlooked by those who blame the shareholder for contributing money to a company that has an employee who commits a negligent act during the course of his employment. They assume that giving money to the corporation is akin to “aiding and abetting” it, so that the shareholder is responsible for all its debts that it incurs as a result of actions it engages in with the “aid” of the money contributed by the shareholder.

But contributing capital to a firm is nothing more than aiding it, which co-employees, customers, creditors, vendors, and suppliers also do. If you broaden causal responsibility so much that you would implicate a shareholder just because he gave financial aid to a firm (though as I noted, not all shareholders give money to a firm), then employees, customers, creditors, suppliers are also all liable, which is obviously absurd.

Second, the shareholder may have a vote in electing directors. But then again, he may not; not all shares are voting shares. Further, the shareholder might not exercise his right to vote; and if he does, he might vote against the directors who win; and even if his choice wins, his vote is almost never decisive; and, in any case, rarely is it the case that the director campaigns on a platform of directing managers to permit employees to engage in torts and negligence. These latter qualifications are rarely noted by corporate opponents who blame shareholders for corporate actions simply because they have a right to vote. But possessing a right to vote for directors does not obviously imply vicarious liability for torts committed by employees hired by officers appointed by those directors. In fact, the right to control property does not automatically imply responsibility. If I own a knife and it is stolen by a thief, I am not guilty of murder if the thief kills someone using the knife, even though I still own it. Ownership implies the right to control. It does not imply liability. Liability flows from actions, whether those actions employ means owned by the actor or not. In other words, whether one owns a means employed in an act of aggression is irrelevant. Likewise, having an ownership (control) right does not automatically imply responsibility.3 (A related point is that shareholders are not even “owners” of corporate assets in the same way that I own a knife. The state legally classifies shareholders as owners, but we have to be wary of relying on state classifications.4 The shareholder can influence board composition by vote, and has a right to receive dividends if paid, and some pro rata right to receive part of the assets of the corporation upon liquidation, but a Google shareholder doesn’t have the right to use the Google headquarters or corporate jet.)

What this means is that if you attribute vicarious responsibility to the shareholder merely because he has a vote—that is, he has “some influence” on who the directors are—then everyone who “influences” the firm is also potentially liable for torts of its employees—again, as in the case of holding people liable for aiding and abetting a firm, this can include creditors, who can influence company policy or board composition, employees and their unions, important suppliers, and the like. Again, this is obviously absurd.

The kneejerk and simplistic rules that would implicate shareholders for torts of employees based simply on the fact of ownership, voting, and contributing capital, would also render hundreds, thousands, maybe tens of thousands of people jointly and severally liable for the negligence of Pepsi truck drivers. This is obviously not a result compatible with libertarian theory.

So it seems that a shareholder who is truly passive and does not manage the affairs of the firm, nor make management decisions or direct the actions of employees, should not be not liable for torts committed by such employees. Why should he be? Hessen, Rothbard, and Pilon are right.

It is important to recognize this because opponents of state incorporation claim that the state’s grant of limited liability to shareholders is a huge privilege granted to them that would disappear if the state were to get out of the business of granting corporate charters. In fact, here the state and the left-libertarians share the same presupposition: that absent state incorporation privileges, shareholders would be vicariously liable, via respondeat superior, for torts of employees of companies the shareholder owns stock in. The state uses this false claim to justify regulating the company; the left uses this false claim to exaggerate how much benefit existing state-chartered corporations must be receiving, and to predict that a state-free world would look vastly different, and that our current “capitalist” order is dominated by the state and not really free at all.

Likewise, as already mentioned, another fallacious view shared by the state and the left-libertarian opponents of incorporation is the idea that a corporation cannot exist unless the state grants it the privilege of “legal personality,” i.e. makes it a separate legal entity. The state makes this claim to hold itself out as the firm’s benefactor, and claims the right to place conditions on this grant—various regulations, etc. And if it’s a separate legal person or entity, why, gosh!, it owes income taxes! It’s a person, after all, isn’t it? And the left-libertarians join in this refrain by claiming that state incorporation grants the legal entity privilege to corporations, and they could not exist without it. Some privilege, that subjects you to regulation and income taxation! So: we can see that the state’s fallacious claim that it is granting a privilege of legal personhood to the corporation is used to justify double taxation: first, the corporation, as a “legal entity,” is subject to corporate income tax; then the shareholders are subject to capital gains or income tax when they receive dividends. Effectively, the shareholders are double-taxed. Some privilege.

But this view is confused too. As Hessen has explained (see previous references), a company having a “corporation”-like structure could arise on a free market using private contract alone. It could sue in “its own name” (as a convenience); it could have perpetual life; contractual debtors could go only against the corporate assets and not those of shareholders, since they agreed to it; and victims of torts of employees of the free-market “corporation” could sue the employee-tortfeasor but not the shareholders, since they are not causally responsible for his torts any more than the customers are.

Ending Incorporation

In any case, we can agree with the left-libertarians that the state ought to stop granting incorporation status. Contractual firms would arise—I don’t know if they would be called corporations, joint stock companies, limited liability firms or what—and the state would have less justification to subject them to income taxation—to impose double taxation on shareholders. Firms would be far better off—and shareholders would still have natural limited liability. What’s not to like?

Why left-libertarians think corporate status is some net “benefit” to every firm in the Fortune 500 (again, see the comments to Long’s post “Double Standard”) is a mystery to me. Removing SEC “public company” regulations (which cost each public company about $3–4M a year) and removing corporate income tax alone would be a huge boost to American capitalism. So what if the name of the standard form of organization changed? Small price to pay.

In sum, yes, get rid of state corporate chartering, and the corporate taxation and regulation that accompanies it.

For some more discussion of these and other ideas, see my post Capitalism, Socialism, and Libertarianism; I also discuss some of these issues in Episode 133 of This Week in Tech.

Appendix: Corporate America being “part of the state” and the calculation problem

Some final comments. Note that the left-libertarians’ confused adoption of the state’s underlying rationale for monopolizing, regulating, and taxing corporate-firms causes them to conclude that the US economy is basically dominated by companies that are in reality parts of the state. Instead of viewing only some firms as closely in bed with the state—defense contractors, say—they view virtually all of corporate America as agents of the state. Even a Walmart or Apple are thought of as parts of the state—in a fascist sense, that is: they are nominally private but really parts of the state because of the various state “benefits” and “privileges” these companies receive. (See my post Apple vs. Microsoft: Which Benefits more from Intellectual Property?) Walmart benefits—maybe disproportionately—from state subsidies to highways etc. (though the local mom n’ pop shops ship things in from far away too). Nevermind the corporate taxes and SEC regulations. It “benefits” from the “privilege” of the state grant of entity status (which it does not need to exist, as Hessen shows) and from exempting its shareholders from general liability from torts of employees (which they do not need since they would not be personally liable anyway in a free society; and which could be taken care of easily anyway by a simple and cheap extension of D&O insurance; and which the corporation usually has sufficient assets to handle in any case).

Take Walmart: the left-libertarian thinks it is unlibertarian (in a “left-thick” sense) because it has bosses and hierarchies that allows it to “boss people around” in ways it could not get away with on the free(d) market. It is only able to get away with these thick-libertarian oppressions and exploitation because of the net benefit and privileges it gets from the state. The non-left-libertarian agrees Walmart and other companies’ structure etc. is distorted because of the state but sees no reason at all why a Walmart of some type could not exist on the free market—in fact, I would think it highly likely Walmart could do even better, shorn of the costs the state imposes on it too. (That is not to say that there would not also be more local, small, diverse companies, more self-employment, more self-sufficiency, more early retirement. The free market would be rich and diverse.) Even an Apple Inc., which now does benefit in some ways from patent and copyright law that it uses to suppress competition, could exist and prosper, by selling high-end hardware, like the Mercedes of computers—even if it would be less able to stop clones or maintain its closed model.

In the recent debate on Roderick Long’s blog, some of the left-libertarian commentators imply that virtually every one of the top 500 public corporations in the US is illegitimate, and part of the state. This of course implies that many others are too, and even that a vast swath, if not most, of the US economy is effectively part of the state. Now I’ve detected this implicit view before, and I’ve (informally, in blog posts and comments) observed one problem with this view is that it implies that the apparent “capitalist” prosperity we see is all a mirage. (See Is Macy’s Part of the State? A Critique of Left Deviationists.) This is because, if you accept Mises’s calculation argument, a centrally run economy cannot be economically prosperous. If most of corporate America is “really” part of the state, then the calculation argument means we must be in a USSR-style shambles, despite appearances to the contrary. Sure, I realize the GDP measure has methodological problems, and that the state exaggerates and propagandizes, but what’s more plausible: that we are really all poor, living in a 1970s Soviet-Style morass with just faked prosperity (hey, maybe we never made it out of the Malthusian trap in the 1800s after all; maybe the whole Industrial Revolution is a mirage!); or that there is actually a vast amount of prosperity generated by the underling genuinely free market economy despite the state’s depradations? As far as I can see, the left-libertarians have to argue the former; I think most sensible libertarians will take the latter view.

The former view is what results from the idea that most state corporations are “net beneficiaries” of the state. As the state cannot produce wealth but can only destroy it, if the bulk of US enterprise is a net beneficiary of the state it must come from the remainder of society, meaning an overall impoverishment for everyone—meaning the apparent prosperity and productivity of the last 20, 50, 200 years is a mirage. Simply declaring “hierarchical” firms that have a corporate charter “net beneficiaries” of the state is obviously the wrong criterion, since it leads to absurd results: it leads you to deny the evidence of free market generated prosperity that is before our eyes. (This may be one reason Kevin Carson objects repeatedly to my Misesian calculation argument along these lines.) Obviously we need a more selective way of determining whether a given firm is a net beneficiary of state aid or not. It has to be a minority of firms—otherwise we would be living in a USSR-style third world shambles. A firm that is heavily dependent on something that would not appear the same way in a free society would be suspect, such as the military defense contractors. Firms heavily dependent on subsidies, or IP (like Microsoft), would be more suspect than others, but even here, Microsoft provides a useful product, albeit at prices inflated by its copyright monopoly. It may not be possible to develop rigorous criteria, but why do we need to? We have systemic and economic reasons—plus common sense and experience dealing with many firms in society that obviously do more harm than good—to doubt the claim that most of corporate America is a net beneficiary of the state. Hell, most of us even think that individual humans who rise to the top of power, like Barack Obama, are harmed in a deep sense by achieving “success” and power the way they do.

Notes

  1. See vol. 20, no. 1 and vol. 19, nos 3-4, of the Journal of Libertarian Studies, focusing on these and related issues, in particular articles by, and in response to, Piet-Hein van Eeghen’s anti-corporation views, and Kevin Carson’s views on mutualism. []
  2. See Roger Pilon’s Corporations and Rights: On Treating Corporate People Justly, which has some very good stuff on why limited liability does not give any special privilege to shareholders; also my posts Legitimizing the Corporation and Other Posts; Rothbard on Corporations and Limited Liability for Tort; Defending Corporations: Block and Huebert; Pilon on Corporations: A Discussion with Kevin Carson; Corporations and Limited Liability for Torts; In Defense of the Corporation; also my comments to “Jeff Tucker’s post Scrupulosity and the Condemnation of Every Existing Business”; and list of resources on this in Sean Gabb’s Thoughts on Limited Liability. []
  3. See my posts The Libertarian Approach to Negligence, Tort, and Strict Liability: Wergeld and Partial Wergeld and The Non-Aggression Principle as a Limit on Action, Not on Property Rights; also IP and Aggression as Limits on Property Rights: How They Differ. []
  4. See my post The Over-reliance on State Classifications: “Employee” and “Shareholder”. []

2 responses to “Corporate Personhood, Limited Liability, and Double Taxation

  1. A lot of interesting stuff here – but I do not think it would matter to a hard core “Occupy” person (the sort that either wave Red flags or Black ones – or both).

    The exact nature of 19th century limited liability statutes are a matter for debate (would the world be a better place without them – or not) – although the actual concept of limited liability (and of corporate personhood) is ancient – it is (of course) the basis of churches. clubs, societies and so on.

    But let us say that it all vanished – and banks and other big enterprises were partnerships, or family businesses, or owned by single individuals.

    Would the hard core Occupy types hate them any less?

    My belief is that they would hate them just as much.

    At the root of this is hatred of “the rich” – of the “1%” and so on.

    All the talk about “corporations” is really about as solid as the speech (by the Baldwin puppet) near the end of “Team America: World Police”.

    Of course if people really wanted to roll back “faceless” corporations they would do such things as cut (reduce) indivdual income tax and abolish capital gains tax. And get rid of inheritance tax.

    This would make the individual (or family owned) business a better bet – and would also mean that corporations were less “faceless” in that individuals would own more of the shares and pension funds (and the like) would own less.

    But do the Occupy types love family owned German manufacturing enterprises? Most likely they support that vampire (and corporate welfare type) Warren Buffett and his campaign for higher inhertiance taxes in Germany – so that (as in America) family enterprises sell out.

    Rather than support lower individual income taxes and an end to inheriance tax, the Occupy types support the exact opposite – seemingly unware that real life “corporate vampires” love higher individual income taxes (and higher capital gains taxes) and love inheritance tax.

    After all one of the largest enterprises in the United States that is not “faceless” (and actually produces stuff – as opposed to Wall Street games) is the enterprise owned by Charles and David Koch.

    And I do not remember the Koch brothers (with their enterprise in oil, steel and so on) being beloved by the Occupy movement.

    No the whole thing is just hatred of “the rich” – the stuff about “faceless corporations claiming personhood” is (for the Occupy types) just window dressing.

  2. The point about Mircosoft is interesting.

    The conventional story is that Bill Gates was not a political person till the government types tried to destroy his business with “anti trust” (as usual anti trust and “competition policy” are a way of the government doing all sorts of evil stuff) – then he hired a lot of lobby people in Washington D.C. (formally he had known) started to pay the protection money (sorry the “campaign contributions”) and campaign for various “liberal” causes – from gay marriage, to a State income tax (in Washington State) to higher inheritance taxes.;

    Actually he is sometimes useful (in an odd way) in that the left have made Mr Gates such a hate figure that the to say “Bill Gates is funding …… campaign.” is a good way of getting people to vote against it (one reason that Washington State still does not have a State income tax).

    However……

    The point about the copyright monopoly is interesting.

    Without getting into the bear pit of the intellectual property debate – does it influence Bill Gates?

    After all the government has this man by the throat – all his money comes from his copyrights.

    To destroy people like the Koch borthers or Jon Huntsman (senior) one has to take physical assets – oil wells, factories and so on.

    With Microsoft all the government has to do is stop enforceing copyrights.

    Now I am not saying that copyrights are wrong (or that they are right), but perhaps Mr Bill Gates feels scared – has always felt scared.

    Hence his statism? His effort to ingraciate himself with the unversity crowd collectivists? Even though they still hate him – no matter what he does, or how much money he gives away.

    Stil the above does not explain Bill Gates’ father – whose politics are also off- the-peg establishment stuff (perhaps Gates just does not have the time to think about politics – and so just repeats whatever he hears on the evening news).

    Still the world is a odd place.

    For example, the Occupy moverment people marching right past the home of George Soros (the arch Wall Street manipulator) without shouting anything – all the way across town to the home of the Koch brothers (who do not have much to do with Wall Street) then all Hell breaks loose…..

    And it turns out that the Occupy movement (sworn enemies of Wall Street) are getting money from groups like the Tides Foundation and the Centre for American Progress (also “corporate persons”) – which are funded by…….. (well you work it out).

    No I do not think that talking about the pro and cons of corporate personhood (no matter how well one examines the matter) is really going to get to the heart of what is going on.