John Hasnas has a Princess Bride problem:
In the much-beloved movie, The Princess Bride, Inigo Montoya has spent his life seeking revenge against Count Rugen, the man who murdered his father. When he finally confronts Count Rugen, he keeps repeating, “Hello. My name is Inigo Montoya. You killed my father. Prepare to die.” Finally, in utter frustration, Count Rugen yells, “Stop saying that!”
I know just how Count Rugen felt.
Everywhere I go, people begin arguments for a wide variety of normative conclusions with the premise, “Corporations have the special privilege of limited liability.” Thus:
- “Corporations have the special privilege of limited liability; therefore, they have social responsibilities that individuals and other businesses do not.”
- “Corporations have the special privilege of limited liability; therefore, government regulation is required to level the competitive playing field.”
- “Corporations have the special privilege of limited liability; therefore, they are obligated to manage their company in the interest of all their stakeholders.”
I encounter this statement in so many contexts, both inside and outside the academy, that, like Count Rugen, I want to yell. “Stop saying that!”
However, in my case, it is not because I fear death, but because the statement is so patently false.
Corporations Do Not Have Limited Liability
Shareholders have limited liability. If a corporation contracts a debt that it does not pay or is found liable for a tort, one hundred percent of its assets are available to satisfy the debt or judgment. If it does not have enough cash on hand to pay what it owes, its creditors may force the firm to liquidate and sell off its physical assets to discharge its debt. The corporation is fully liable for all the debts it incurs and all the torts it commits.
It is the corporation’s shareholders who have limited liability. They are liable to lose one hundred percent of their investment in the firm, but no more. The firm’s creditors may not collect the corporation’s debt or judgment out of the shareholders’ personal wealth. Thus, the shareholders’ liability for the debts of the firm is limited to the size of their investment in the firm.
