Eli5: why the shareholders in a company are not liable to pay debts owed by the company?
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The shareholders are not liable for the company’s debts unless the company is being run improperly and not following the duties and obligations required under corporate law.
Why should they be? They already have the risk of losing money if the share price goes down.
Why should they be? They already have the risk of losing money if the share price goes down.
Reddit and/or society needs to get rid of this myth that shareholder funds are the same thing as the company’s operating budget.
Because the company is totally different animal than the people in it– it’s its own entity. We do this on purpose to encourage people to do business. If you were personally on the hook for a business risk, you’d take less risks, and the economy would suffer.
If they’re doing anything illegal to try to avoid personal liability, then we can “peirce the corporate veil” and hold them personally liable.
The current top answer doesn’t address your question and isn’t a simple answer either.
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.”
because if shareholders would be liable to pay debts, no one would invest. Easy as that. Why would you buy $5000 of Apple stock, when you can lose everything you have?
I take OP’s question to be, *why* do we allow shareholders to keep all the gains when things go well but socialize the losses in situations in which the corporation owes more than it can pay? The answer is to encourage efficient investment and risk-taking, which benefits everyone in the long run by making society more productive.
Imagine a friend of yours invents a new process for extracting flour from wheat. It’s very expensive to get started, but if done right, it can double the output. However, if done wrong, it can not only slash the output but potentially poison people as well. Your friend has no money, so he asks you (and a bunch of other people around town) to invest in his business. You think your friend will do it the right way, but you’re not certain, and it’s possible he could lose control of the business to others who will cut corners. You might be willing to invest if you’re only at risk of losing your investment, but not if you’re at risk for losing everything you own because your friend and/or the townies screw up and you become liable for poisoning a bunch of people. Without a corporate shield, you (and the townies) wouldn’t invest, the new process never gets implemented and perfected, and there’s less flour for everyone than there would be otherwise.
The corporate shield encourages people to invest money in enterprises over which they have no control, in order to empower the people with good ideas but no money to create things. That has to be balanced against the moral hazard that arises when people are shielded from their losses, and there are several ways that the law can do that. For instance, it is sometimes possible to pierce the corporate shield (and hold shareholders personally liable for the corporation’s losses) if the corporation was not adequately capitalized to cover its foreseeable losses to begin with. Also, the law can hold the corporation’s management personally liable for the corporation’s losses (but that has to be balanced against the need to recruit management in the first place, so it’s usually reserved for situations of extreme misconduct by management). In short, a basic theory of corporate law is that there are better ways to achieve good corporate governance than holding shareholders generally liable, which would have very bad effects on investment and productivity.
It’s because of something called “limited liability.” Basically, when you buy shares, you risk the money you put in, but not your personal assets. If the company goes belly-up, the worst that happens is your shares become worthless. You don’t have to sell your house to pay the company’s debts. It’s one of the perks of investing in stocks.
Companies are incorporated. The owners of shares are thus not liable due to how the laws work.
This is often one of the reasons why people will incorporate their business. It shields them from things like liability.
A loan is just a common civil contract. The lenders can ask from nothing to your grandmother’s earrings as collateral.
There are loans that require the owners or directors to personally guarantee the debts and there are some that dont really need anything. A loan just a contract and they can ask for whatever they want. Typical corporate bonds do not require shareholders to share liability because the lenders deem the company’s assets to be sufficient in the event of liquidation and default risk is acceptable.
if you think of shares as a loan of money (with a contractual agreement to pay it back plus a portion of profits) it is easier to grasp.
The company owes the shareholders money (rather than the shareholders having accepted responsibility for all the decisions of the company.
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