More on Corporate Personhood

By dispensing with corporate personhood, we simultaneously get rid of two important things: limited liability and the corporate income tax.

After all, if the corporation is not a legal separate person, funds flow directly to the shareholder (similar to a partnership or sole proprietorship).  Now we could create a legal structure to allow these funds to be held at the corporate level by arguing that each person really simply owns a certain percentage (share) of the corporation and can only realize gains or losses by selling.  This would treat corporations as what they really are: assets of the owners.

While many conservatives would like to rid themselves of the corporate income tax, they simultaneously do not understand that if they do this, they lose the rationale for limited liability.  Limited liability is a benefit but not as great as it might at first appear.  What it really does is help not the common stockholder (who can always sell before his or her stock value goes to zero) but rather the last stockholders who is left holding the proverbial bag.  Yet what limited liability does is exaccerbate the asymmetry between short sellers and long buyers.  Short sellers already have unlimited liability (theoretically) and limited potential benefit (when the stock price goes to zero).  Long buyers have limited liability and unlimited potential benefit.  Eliminating corporate personhoood will reduce this asymmetry.

Here are a few questions that I have received concerning this proposal:

Couldn't companies simply get limited liability through contract?

The answer is no.  While a company can negotiate limited liability with suppliers and customers, third parties who are injured cannot be so casually dismissed.

Couldn't executives simply find a way around these restrictions?

Well, they could purchase insurance but who would insure them?  Since they are the ones making the decision that would lead to the corporation's demise, it would be foolish to provide insurance.  After all, you would be stepping directly into moral hazard.  They, of course, could also reduce their exposure below the 1% threshold provided they resign their office immediately.  However, they cannot keep their office and their benefits without incurring the costs.  Receiving reward without risk is immoral and must not be allowed to continue.

The point is that those who want the rewards should take the risks.  No risk = no reward.  It works for shareholders.  Why not corporate executives?