Bonding Limited Liability
72 Pages Posted: 16 Jul 2009 Last revised: 22 Sep 2015
Date Written: July 15, 2009
Limited liability is considered a “birthright” of corporations. The concept is entrenched in legal theory, and it is a fixed reality of the political economy. But it remains controversial. Scholarly debate has been engaged in absolute terms of defending the rule or advocating its abrogation. Though compelling, these polar positions, often expressed in abstract arguments, are associated with disquieting effects. Without limited liability, efficiency may be severely compromised. With it, involuntary tort creditors bear some of the cost of an enterprise. Most other proposals for reforming limited liability have been incremental, such as modifying veil piercing. However, neither absolutism nor marginalism is inevitable. Reform can be sweeping and yet maintain fidelity to the core idea of limited liability. This Article stakes a middle ground in the debate: liability should be limited against all creditors, but cost externalization to tort creditors can be substantially minimized, if not eliminated, through mandatory bonding that in the aggregate capitalizes a compensation fund. A bond would be minimally burdensome on individual firms, but business enterprise is made to bear risk more fully. Importantly, bonded limited liability is practically administrable and politically feasible. The idea is based on well developed intellectual foundations of enterprise liability and risk retention. This scheme is not only economically more efficient, but also promotes equity and greater social justice.
Keywords: limited liability, tort efficiency
JEL Classification: D2, D6, I3, K22, K10, K19, M2, M14, H23
Suggested Citation: Suggested Citation