Eli5: why the shareholders in a company are not liable to pay debts owed by the company?
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It’s generally not a good idea to have people be liable for the poor decisions of other people. When you buy stock, you are buying a piece of a company, but other than voting once a year, you don’t have a say in how the company is run. A lot of pension funds and retirement accounts are funded with stocks. It makes it real hard to plan for retirement if one can be subjected to unlimited losses.
Because the shareholders are not liable for any debts, they are also the last to get paid if the company goes bankrupt. Secured creditors get paid first, basically any debts backed by real property such as land, buildings or equipment, these get sold off to pay those debts. Secondly, preferred creditors get paid. These are paychecks for the employees currently working and legal fees for the lawyers who are winding down your company and also includes bills due like keeping the lights on and paying for goods purchased on credit. Next, comes unsecured creditors, basically people who the company borrowed money from. If there are any subordinated debts, these get paid next. A company will sometimes offer a subordinate debt at a higher rate and people will take it knowing there’s a greater chance they won’t get paid. Afterwards, preferred stockholders are made whole. These are stocks that the company is obligated to pay a dividend to, but give up their voting rights. Finally, common stockholders are paid what is left, usually pennies on the dollar or nothing.
There used to be a type of stock called assessable stock. With this the company could ask for more money from the shareholders and if they didn’t pay up, the company could resell the stock. There was also capital assessable stock which was liable to pay debts in the case of bankruptcy. These went out of fashion in the 1930s. They weren’t a cause of the depression or anything, but they certainly didn’t help things.
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