A slightly useful explanation of the rights and wrongs of limited liability.

I think it could be expressed more clearly, but it does seem that the idea of limited liability is a perfectly logical conclusion of the right to contract. I think I understand this.

When an individual mortgages his house by specifying that the only collateral is the house itself, both the lender and the borrower accept some risk, but the borrower is not obliged to surrender anything more than the house in the event of a default. The parties agree, and a contract is formed. This doesn’t seem immoral or irrational or bad in any way.

Similarly, when a shareholder invests in a corporation, he is not obliged to surrender anything more than the value of his investment in the event of a corporate collapse. Creditors of the corporation must exercise caveat emptor when dealing with the corporation: if they don’t like the fact that the corporation may go bankrupt and be unable to perform its obligations, they shouldn’t deal with it.

For third parties who are harmed by the activities of the corporation, tort law need not give the decision makers of the corporation an easy ride. If an executive orders toxic waste to be dumped into the sea, it is the executive who should go to jail, not the investors.

Finally, any attempt to end limited liability will be circumvented by ordinary contracts, unless draconian laws are passed limiting the ability to use a contract to transfer risk. That’s essentially the whole point of a contract, so it’s not going to happen any time soon.