LMR. Limited Risk Instead of Limited Liability
... How can the idea of limited liability legal entity (LGE) be made more natural.
Limited liability is granted, in our society, without discretion and lead to a lack of 'skin in the game' where corporations can extract short term profits without having to be held accountable for long term effects.
While admitting that there are valid and positive reasons for some limited liability, it is our opinion that this has lead to a significant lack of 'skin in the game.' In 2014 one may need limited liability to send a private mission to mars, but one probably does not need it to produce fast food hamburgers.
Limited Liability Corporations and other limited liability entities have a positive effect on society when they allow citizens to undertake more risk that the member would be willing to take on themselves. This has led to massive amounts of good in our world. Recently we have seen a trend of bad actors taking undue risks inside of LLCs, reaping huge profits and bonuses, and then walking away without a scratch when the house of cards comes tumbling down.
Is there a way that we can reduce the risk an entrepreneur takes but also require him to bear the long term risk of their decisions?
We believe that prefs will help do this and that limited liability can be balanced with responsible decision making about the future.
How will this work? Let's say an investor puts money into a company to start it. He is one of a few investors and as his money goes into the account he receives some of the initial prefs as well as a portion of the common stock.
In a traditional LLC only his common stock is at risk. If the company fails, creditors can take his common stock but cannot take anything beyond that. They cannot take his personal fortune.
What about the prefs he owns in the company? According to an idea of statutory theft that we will discuss later, he cannot have his prefs taken from him. Is the trade of not having your prefs taken worth forfeiting Limited Liability? We will need to study this.
Let's say this company fails and the owner has his common stock and family fortune confiscated to pay back creditors. He will be bankrupt, but will have his prefs. The prefs he owns continue to work. When his payments of his liabilities go into the company and out to the creditors, he gains more economic pref power. His fortune is wiped out, but he will not be destitute.
We propose that new form of bankruptcy be enacted by rule of law that allows for all assets owned to be confiscated to pay off creditors but then a line is drawn at a point in time where the citizen is able to begin rebuilding their wealth via the pref payments they receive.
Will this risk the public investment in common stock that has driven the rapid rise of public stock companies? Yes, most likely. One will be far less likely to buy a share of Exxon at $98 if they are actually risking significantly more than that because limited liability no longer exists.
How will companies raise money then? We will propose a new funding source that benefits society as a whole and leads to a liquid source of capital for companies to grow in our discussion of Everyone is a Bank.
Therefore:
Eliminate Limited Liability and replace it with he concept of limited risk where an investors prefs are protected from bankruptcy but not his current capital assets.
The effect of limited risk on capital markets can be neutralized by Everyone is a bank (BNK)