Friday, July 20, 2012

Corporations


No person shall be held personally responsible for the actions of another person. Every person shall be held personally responsible for his or her own actions and inactions. A business shall be held responsible for the actions and inactions of any owner or employee. When a wrongdoing is not criminal, it's acceptable for the responsible party to receive assistance in paying the damages. When the wrongdoing is criminal, it's acceptable for the responsible party to receive assistance in paying the damages but the members of that party may still be imprisoned as a punishment for their crimes. Together, these principles lead to the common-sense outcomes that in a business with two or more partners, if one partner commits a crime or tort without the knowledge of the others, that the other partners will not be liable for the actions of the individual alone; if the other partners knew of the activity and failed to report it or stop it or leave the partnership, then they are responsible for their inaction and become "guilty by association"; for any crime or tort the judge must determine if the activity was a one-time occurrence or if it was regular, and to what extent was the activity a joint responsibility of the business or a responsibility of the individuals involved. This shall not be an automatic determination based on the "type" of business - it must be made separately for each case.

Starting a business is very risky but it has great rewards for the community. Successful businesses create jobs and productive industries bring wealth to their communities. Entrepreneurs and investors need some protection if things don't end well - but that protection must be limited. First, if there is a crime involved there shall be no protections for those persons who were involved with the crime. Second, if the business simply did not work, with no evidence of wrong-doing, then the protection should be only that which was agreed to by the entrepreneur and his or her investors and customers. This is what should be referred to as "limited liability" - it's only by agreement, not a protection from the state.

The concept of the corporation has failed in the following four ways:

One. It has become standard practice for judges who convict corporate executives of wrongdoing to fine them either a tiny fraction of the damages they caused and to allow the corporation to continue operating, often under the continued management of more senior executives who were principally responsible for the wrongdoing, or to fine the corporation an amount disproportionally big to the actual damage in order to "make a point" and not hold individual decision makers liable for their actions. In both cases, the notion that a corporation is a legal entity separate from any of the citizens who operate it leads to grave injustices.

Two. The limited liability corporation stands in contrast to partnerships as a mode of doing business which is more expensive to create and maintain both in terms of money and the owner's time. For a small business, forming a corporation is unreasonably taxing and is often skipped for that reason, with potentially disastrous consequences for the business owner. Those disastrous consequences usually come about because a judge holds the business owner personally responsible for the actions of his employees or the misfortunes of his customers. Even if the business owner was personally responsible for the problem, unless its criminal it should be possible to tax that business until the actual damages are repaid.

Three. The term "limited liability corporation" should be a label for an agreement that has been executed by entrepreneurs and their investors, not something that is at all related to crimes or taxes or torts. If a family owns a business and a customer has a misfortune, they should be no more or less liable for the damages than a corporation would be.  But what often happens is that bigger businesses, by virtue of doing more business, if they have wronged their customers in some way when all the customers band together to sue the business is usually able to reach a settlement and pay less damages, and therefore it is less liable for a wrongdoing than a small business would be to a smaller group of wronged customers. This is unjust. A bigger business should not be made less responsible just because it is bigger.

Four. Large corporations have stolen from the public or from their customers astronomical amounts, acted fraudulently, bribed government officials, and were left unscathed or even allowed to continue doing business with the government and with the people they defrauded. It's absolutely disgusting. America is still suffering from echos of "too big to fail", of settlements of millions of dollars that represented only a small fraction of what was robbed, of corporations receiving bail-outs from the government while their executives continue to receive enormous salaries or benefit packages. The concept of the corporation has caused a great deal of harm to the public. Large corporations that are known to be harmful continue to exist.  If the persons responsible for the largest crimes in the history of the world were truly held responsible for their actions, and if the corporations that they managed were sentenced to repay the entirety of the damages they caused, then not only would we have justice, but we would also have a useful deterrent against future crimes. Currently we have neither.

So what I propose is to do away with the concept that a corporation is a legal entity separate from the people who own it. The government should treat all businesses equally in this regard: The structure of a business should not determine its protections and liabilities. Sole proprietorships and partnerships should have the same legal protections as corporations and corporations should have the same legal liabilities as sole proprietorships and partnerships. The liability of an entrepreneur to his or her investors should be determined by their agreement. If a large business commits a crime so large that it cannot repay the damages - then it must be disbanded; the assets seized by the state for sale and the proceeds distributed to repay damages; and all the responsible executives held personally responsible and imprisoned for some time.   In other words, all businesses are corporations, and all people are personally liable for their own crimes regardless of their involvement in a business.