Eli5: why the shareholders in a company are not liable to pay debts owed by the company?
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You’re talking about the “limited liability” you can get with a bunch of different company structures. The idea is that the owner is only risking what they’ve put in.
That’s an idea that goes back a few centuries and is written into the laws of every US state and probably every developed country in the world (although I haven’t actually checked that.) Not every company is structured that way, but many are.
It’s important because it allows people to invest in a company without feeling like they have to constantly monitor what the company does for fear that if the company screws up, that the owner will be bankrupt. That, in turn, allows investors to turn control of the company over to a much smaller group of people (typically called ‘directors’). It allows people without the ability to monitor a company’s doings to invest without concern. It allows people to invest in multiple companies at the same time. All those things have greatly expanded wealth across the board.
Consider this: if you’re in the US, you may have a 401(k) that’s invested in a mutual fund, which means that you have a tiny little piece of hundreds of different companies. Let’s say that one of those companies happened to do something really, really awful that created a crapload of liability and the company goes out of business as a result. You only lose the little bit of that mutual fund that was invested in the company. The people injured by the company aren’t going to go after you. If they could, nobody would invest in the mutual fund. And, your retirement savings would be in some savings account at a bank earning 1.5% per year, while with the liability protection, you might earn 10%. That’s the difference between having a comfortable retirement and really not being able to retire at all.
Meanwhile because those companies can now exist, they can now put wages into the pockets of millions of people and embark on much larger and more expensive projects than would be possible otherwise. That’s a huge economic benefit as well.
So, the answer to the question “Why do governments allow limited liability ownership of companies?” is “doing so allows many people to be prosperous.”
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