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Comment by phildini | Hacker News Reader

As soon as stakeholders are personally responsible, you suddenly have no protection afforded by the corporation.

"That's Great!" you might say. "Now everyone will make more careful decisions."

Except what will actually happen is people will stop forming companies, since they will be completely liable for things outside their control, like the bad decisions of others or stock market crashes or the weather.

The US corporation system is by no means perfect, but the protection it allows people who are actually trying to create things (read: not patent trolls) really does foster innovation a lot of the time.

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I've always thought the justification for corporate limited liability was even flimsier than the justification for patent protection. At least with the latter you can point to economic theory and say that patents address free rider problems. What economic theory justifies corporate limited liability? Why should anyone be insulated from any liability incurred by their profit-making activities?

Probably because it's unreasonable for me to lose my house to a patent troll like these guys. Taking risks is good for the economy in general. Without the LLC giving me some protection from patent trolls it'd be too risky for me to start my own business.

Because without limited liability there is a MUCH smaller incentive to start a company. There are plenty of good intros as to how the invention of limited liability really was the beginning of modern economic takeoff. I recommend Ascent of Money" by Niall Ferguson for a good intro.

Sure, but why is that smaller incentive not the right amount of incentive? You can create incentives for a lot of things, but generally those are distortionary. What economic justification is there for the idea that there needs to be a bigger incentive than the market provides?

That's an empirical question, and deserves an empirical treatment. I cannot do that in a comment. Luckily, this question has been thoroughly investigated for almost two centuries. If you want a serious treatment, you might look to:

http://www.jstor.org/stable/825483?seq=2 http://heinonline.org/HOL/Page?handle=hein.journals/uclr52&d...

But if you want a more casual treatment that explains it (and all the associated issues like why bonds and stocks and debt contracts even exist), I really recommend The Ascent of Money by Niall Ferguson.

Limited liability encourages risk taking which, in aggregate, appears to lead to greater overall growth.

Limited liability enables the sale of corporate equity. Without it, purchase of an ownership stake in a company incurs potentially unbounded downside risk. So, in addition to "encouraging entrepreneurship" (which I agree is a nebulous benefit), limited liability also helps distribute the benefits of industrial capitalism to e.g. pension funds.

Without limited liability, if Lodsys wins, you lose your house. That should make things clear enough.

Why wouldn't you pay for insurance to cover your liability? If you are taking on a lot of liability, then you deserve to lose your house.

When you complain about how high insurance rates are (think medical malpractice), there might actually be "tort" reform against patent trolls.

The pessimistic view is that not needing to worry about empathy is good for making money. The optimistic view is that having what amounts to a public insurance policy baked into your economic system is good for making money. Probably both are true.

Why should anyone be insulated from any liability incurred by their profit-making activities?

You do realize, that this is the primary reason that corporations are formed, at least in USA? There are good arguments for the fairly radical proposition that we should end the corporation and the role it plays in our economic system, but you should recognize the scope of the argument you're making.

There is plenty of precedent for laws which pierce the corporate veil in case of fraud or abuse. Such laws have yet to dissuade the formation of new corporations, and there is no reason to suspect that allowing it in the case of patent trolls would result in anything other than dissuading patent trolling.

What if this style of case assessment was limited to patent cases?

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