Limited Liability

Limited Liability

A Legal and Economic Analysis

Stephen M. Bainbridge and M. Todd Henderson

The modern corporation has become central to our society. The key feature of the corporation that makes it such an attractive form of human collaboration is its limited liability. This book explores how, by allowing those who form the corporation to limit their downside risk and personal liability to only the amount they invest, there is the opportunity for more risks taken at a lower cost.

Chapter 11: Conclusion

Stephen M. Bainbridge and M. Todd Henderson

Subjects: law - academic, corporate law and governance

Extract

Limited liability is one of mankind’s greatest ideas. Creating artificial entities—a corporation, a limited liability company, or the like – and using it as a mechanism of risk taking was the key legal innovation that drove much of the economic growth that created our modern world. Figure 11.1 shows the dramatic increase in wealth that began during the early nineteenth century, precisely when limited liability as we know it today was developed in New York and elsewhere. Although the widespread adoption of limited liability at that time was not a sufficient condition for the Industrial Revolution, it was undoubtedly a necessary condition for modern capitalism to generate such wealth. Without limited liability, the massive risk taking necessary to build railroads and canals, to invest in large-scale industrial enterprises, and to fund research and development of new technologies would not have been possible. As we have argued in this book, before the Industrial Revolution, businesses could be funded out of the personal wealth of an individual or family. Most business was local and the scale and scope of human activity was limited by the technology of the day. But as inventions increased the complexity and reach of business activity, we needed a new means of aggregating human actions on a much larger scale, as well as an efficient means to operate and to regulate these business operations. Legal personhood and limited liability were the innovation that made this possible.

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