Stephan Kinsella on Limited Liability: Notes of a Speech Made to the 2013 Meeting in Bodrum of the Property and Freedom Society

The Role of the Corporation and Limited Liability
in a Private Law Society
Speech by Stephan Kinsella to the Eighth Conference
of the Property and Freedom Society,
Held in Bodrum in September 2013
(Reported and with a Commentary by Sean Gabb)

Note: This is not a transcript of Stephan’s speech. It is a summary made as he spoke, that was at first intended purely for my own diary. However, since mine appears to be the only written account of the conference as a whole, and since this speech raises issues that are of particular interest to me, I have decided to publish it on the Libertarian Alliance Blog. If I give myself the best side of the argument, that may be the effect of bias – or it may be because I won the argument. Of course, by publishing, I make it possible for Stephan or others to correct my view of whether I won. SIG

Murray Rothbard once asked Mises for a clear distinction between a free and a socialist economy. The answer was possession of a stock exchange: he believed this was crucial to the existence of capitalism and private property.

Now, a stock exchange means the existence of joint stock limited liability corporations. These exist in order to minimise transaction costs. There are upper limits to their size, and there are other forms of business organisation – sole traders, partnerships, and so on.

There are three essential features to a corporation. These are legal personality, perpetual duration and limited liability. A corporation is regarded by the law as a person, with most of the rights and civil responsibilities of a natural person. Following from this, it is responsible for its own debts. The directors and shareholders are not usually called on to pay from their own assets, if the corporation becomes insolvent. There is a veil of incorporation that, save in the case of plain fraud, the courts are reluctant to lift.

At the moment, these features are all obtained by state registration. Critics regard them as state-granted privileges. Critics from the left, like Ralph Nader, argue that these privileges should justify heavy regulation to enforce good and responsible conduct. But there are many libertarian critics who argue that the privileges are in themselves illegitimate.

Are corporations like roads? These are presently built and maintained by the State. But there is no doubt that they would be built and maintained in a free society. It is the same with marriage. This is presently defined and regulated by the State. But marriage would continue to exist in a free society. Or are corporations like patents and copyrights? These are purely creatures of state legislation, and probably could not exist without the State.

Those libertarians who deny the legitimacy of corporations go further, so far as they believe them to be part of an artificial order that involves a more hierarchical society than would otherwise exist – a society in which there is more paid employment than would otherwise exist.

Let us pay no further attention to these wider considerations. The main question is whether limited liability would exist in a free society. There is little argument about entity status. This could be obtained by various kinds of private agreement in much the same way as marriages would be recognised. Nor is there any argument about contractual limitations of liability. The debate is over limited liability in the event of insolvency due to a torts award.

I believe that the debate is misconceived. It is based on the assumption that, in the absence of a grant of limited liability by the State, the shareholders ought to be, or would be, liable for the debts of a corporation. This rests on two further assumptions. The first is that shareholders actually own a corporation. The second is that the owner of a business should be responsible for the torts of his employees.

The first assumption is dubious. Shareholders have the right to elect the directors of a corporation, and the right to a share of any profits. That is the limit of their “ownership.” They have no right to use the property of their corporation, nor any control over its day to day use.

The second assumption is based on the law of vicarious liability. This derives from a more hierarchical age than our own, when employers had non-contractual legal rights over their workers – rights comparable in nature if not in extent to those of an owner over his slaves, or of a lord over his serf. Vicarious liability has little justification in an age of purely contractual relationships.

Let me give the example of a gun company. If someone buys a gun and uses it to commit a crime, should the manufacturer or seller be held responsible for that crime/ Obviously not.

For this reason, even without a state to grant limited liability, it can be doubted whether the shareholders would be held responsible for the debts of a corporation.

[What follows next is based partly on the issues I raised in the
open question and answer session, and partly on a long debate I had
with Stephan during the next day’s boat trip along the Turkish

SIG Stephan, I’d like to thank you for so clear a summary of your argument, and for so fair an exposition of the opinions of those who disagree with you. However, I find your analogy of the gun shop defective. If I sell a gun to somebody, who then goes and shoots someone, the decision of the buyer to commit a crime is a new intervening cause and breaks the nexus between me and the crime.

But let us take this example, and let us leave aside any matters arising from the veil of incorporation. I am the sole proprietor running a delivery company. While going about my business in my time, one of my drivers causes an accident and hurts someone or damages valuable property. The driver himself may be without assets.

I grant that in both England and America, the doctrine of vicarious liability has been pressed too hard. At the same time, It troubles me that, in the case just given, I shall not be responsible for accident caused by my employee. And I say that regardless of whether I have been personally negligent in my selection and training of the driver, or in my choice and maintenance of the van. Your idea that ownership does not carry responsibility strikes me as bizarre.

And what applies in the case of a sole proprietor is not changed if I decide to run the company as a joint stock limited liability corporation.

SK I grant the impropriety of the gun shop example. I should have done better there. I also take your point about vicarious liability. In some cases, the directors and even the shareholders should be vicariously liable for the torts of their servants. But I still insist that shareholders cannot be regarded as the owners of a corporation. Their rights are so limited that they cannot be taken as the rights of an owner.

SIG So, who owns corporations like British Petroleum?

[The answer given here was not satisfactory. Its burden is “Not the
shareholders.” I cannot say more than this, because the answer had
no obvious focus.]

SIG Stephan, I deny your claim, that shareholders cannot be regarded as the owners of a corporation, because their ownership consists solely in the right to elect directors and share in the profits. You are confusing rights possessed with rights exercised. The shareholders of a corporation have the undeniable legal power to change the articles and memorandum of association, so that they must be consulted on all management decisions. It might not be consistent with good management for a company to be directed by something like the Assembly of democratic Athens. But that is beside the point. They have the power to do this. If they do not choose to make use of the power, that is their choice, and possibly their negligence. As such, they are as much the owners of a corporation as the proprietor in a sole tradership is the owner of his business. Granted you have allowed the legitimacy of some degree of vicarious liability, your whole argument about limited liability falls to the ground.

[The rest of the argument – all on the boat trip – was long and
involved, and mostly concerned the distinction between contracts of
permanent service and contracts for services. It is not strictly
relevant to this record. But here is my side of the argument. I look
forward, in due course, to Stephan’s response.]

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10 responses to “Stephan Kinsella on Limited Liability: Notes of a Speech Made to the 2013 Meeting in Bodrum of the Property and Freedom Society

  1. I found this very interesting. Shareholders and “responsibility” – “As such, they are as much the owners of a corporation as the proprietor in a sole tradership is the owner of his business”. It will be interesting if Stephen does reply.

    I tend to agree with your analysis Sean.

  2. Opposing a French Revolution style effort to destroy all corporations (whether commercial or charitable – after all Churches and so on, are bodies corporate, and corporate law evolved in Canon Law as well as Law Merchant) is NOT the same thing as a accepting things as they now are.

    No one need trade with a limited liability company (or club, of foundation or …..) if they do not want to – and no one has the right to demand that “the little old lady in Leeds who owns a few shares in the company should make good my loss now the company is bankrupt – even though I KNEW IN ADVANCE that the enterprise was operating on a limited liability “trading pot” principle, But that does NOT mean that things do not need to change from what they are now…..

    There is a vast web of regulations (especially in the United States) “protecting” corporate managers from the shareholders (the actual owners of the company) – all of these regulations should be repealed.

    Also tax law (in Britain as well as the United States) favours “institutional shareholders” over individuals and families.

    This leads to the situation where hired managers at companies are responsible to other hired managers at Pension Funds and other such – hired managers responsible to other hired managers, with no true OWNERS.

    This is also wrong – and tax law (on such things as income tax. capital gains tax, and inheritance tax) should be changed so that individuals and families are not put at a disadvantage compared to institutional investors.

    In Germany individuals and families sill dominate the ownership manufacturing companies (due to German tax law historically being different) – and I think this is better than Britain and the United States where even if someone creates a company (builds it up from the start) the only way to protect their children from terrible level of taxation is to turn them into “trust fund kids” which ensures their income, but means they are robbed of real OWNERSHIP of the company.

    By the way on legal liability…….

    If an individual is proved to be of blame for the unlawful action of a body corporate (a company, a church, a charity, a foundation, a club – whatever) that INDIVIDUAL is still legally liable.

    That is a point that is often over looked.

  3. It seems to me everyone is sort of dancing around a mulberry bush by making assumptions about this hypothetical libertopia and what form “no State” will take, as if that is agreed.

    The point really is that personhood is in the gift of the legal system, and the rights and responsibilities of persons are defined by the legal system. It so happens that the State runs our legal system and makes the laws. But the question of personhood and liabilities in some other society will depend on who makes the laws, and however it is decided that laws are made will decide whether or not various corporate structures are persons and what liabilities they have.

    Rather than gun shops, think of babies. The lawmakers, whoever they are, may consider them persons, and to have certain rights, but not liabilities, or their liabilities may be placed upon their wards. If your baby vomits on my car seat, you are liable for the cleaning costs, not the baby. Probably.

    But as I’ve said before, there are no natural rights. All rights, responsibilities, liabilities and definitions are human inventions and are arbitrary; though some forms will be more effective or desirable than others. So trying to argue about what would be seems to me to be presuming some imaginary, impossible “natural” system where everything falls out of nature, and there is an objective rightness or wrongness to some structures such as corporations. And that just isn’t reality.

    These questions, in any society, will be arbitrary (though hopefully deeply considered) judgements by those who make the laws. As such, like every other legal definition- including that of a natural person themself- they will be “privileges” in the gift of whoever the lawmakers are. There is no deeper answer to be found. There is no natural law.

  4. If the taxes and regulations that favour institutional investors (pension funds and the like) are repealed it should be possible for individuals and families to own most shares directly – after all this was the case in the United Kingdom as recently as 1965. Reversing the “Big Bang” (returning the City of London to a series of private companies and clubs – not the mountain of regulations that now dominate “The City”) would be a good start. After all (for example) there was no law forbidding rival stock exchanges (and there have been rival stock exchanges) nor was there any law forbidding trading “off exchange”.

    As for the basic principle of limited liability – it should be a matter of choice.

    If someone does not want to deal with a limited liability company (for example buying insurance from Lloyds “names”, or whatever – rather than an insurance company) that is fine.

    And if someone wants to trade with a body corporate (a church, an association, a trading company – whatever) that is also fine.

    After all bodies corporate (including merchants acting with a common Trading Pot – with only the money in the pot at risk) are a lot older than the modern state – and certainly were not created by any system of state law. Indeed the state copied much older systems of law – both Church Law and Law Merchant.

    However, those who choose to refuse to trade with bodies corporate – and choose to trade only with individuals with unlimited liability will have to pay higher prices and accept an inferior choice of goods and services.

    But that is their choice..

  5. Sean, why in gods name should you be responsible for the actions of your delivery driver?

    If your driver – by negligence or deliberate action – caused death or damage to another party, he alone holds responsibility for his actions. To say otherwise means you admit to having violated the property rights of the other party (their bodies harmed, or physical property). But when viewed from a consistent application of libertarian property rights theory, how so?

    The fact he was driving your truck and doing your work chores is immaterial.
    You contracted the driver to deliver goods. You did not contract him to harm or damage the other party. There is no direct link and violation of property rights on your part.

    To say otherwise just opens the door to unlimited liability claims. Its funny that this blog is the bigger proponent of ‘anti corporation’, ‘anti-boss’, lets all be an ‘independent contractor’ type of thinking. But then you make the implicit assumption that being an ‘employee’ somehow absolves people of being responsible for liability incurred during the course of their daily action.

    Go back to first principles. What exactly is an employee? It is someone who agrees to perform labour in exchange for a title transfer of money, but with regularity. From a technical standpoint it is no different from an independent contractor performing a once off job.

  6. Lets go further, someone driving to the shop to get a carton of milk as a favour to their neighbour – from a technical standpoint – is doing the same thing as an ‘employee’ who performs physical actions daily in exchange for money.

    Do you think the employer has more liability than the neighbour if an accident occurs? If so why? How does asking a favour versus transferring title to some physical item, change the equation to liability?

  7. And that’s why, even in Libertopia, there will be arbitration systems.
    Who is responsible is never so clean cut. Sean owns the van. If the accident is caused by shoddy maintenance then Sean may be held liable. If it is caused by driver error, then perhaps the driver.
    But what if the driver is drunk?
    What if the driver is drunk AND the brakes fail?
    What if the brakes are shoddy and the driver sober, but the accident is caused by swerving to avoid a pushchair carelessly piloted into the road by a drunk parent? Who owns the pushchair? The baby?
    It’s impossible to set some concrete system of liabilities in advance of the incident.

  8. I think you’re all full of shit. You are taking a very monist view. As anarchists, you should know better. I offer a more pluralist panarchist model.

    If there are competing DROs catering to different tastes and senses of justice (among other things,) would not some offer plans/compacts with LL and some without, some with IP and some without, and so on? And for firms that do support LL, would there not be different cutoffs, policies, and decisions about who is liable and to what degree? General Lockean/Nozickian theory doesn’t help with these practical details, nor the legal line-drawing.

  9. Pingback: Stephan Kinsella, “The Role of the Corporation and Limited Liability In a Free Society” (PFS 2013)