Last year I had an email discussion with a friend, Johann Gevers, about legal entities and corporations and such. Our discussion, lightly edited, is appended below, with Johann’s permission. For background see my post Corporate Personhood, Limited Liability, and Double Taxation.
GEVERS:
Stephan,
I’ve read Robert Hessen’s In Defense of the Corporation and found it excellent. I found it interesting that he disagrees with the notion that corporations are distinct entities, separate from the voluntary association of individuals (shareholders, board, executive, etc.) that makes up the corporation. Also interesting is his careful and insightful description of corporate liability for tort, distinguishing intentional and unintentional / negligence cases, and pointing out that principals (such as board members, executives, etc.) do not escape liability for their actions, i.e. cannot hide behind the corporate veil (though he doesn’t use this term).
However, some legal scholars, such as Frank van Dun, do not think that limited liability entities are compatible with a natural order.
I’m curious if you have any further thoughts or refinements about how best to form legal entities in a completely free society where there is no authority regulating incorporation and registration of legal entities. Hessen is not an anarchist, but a minarchist, so he sees a role for government mandating certain minimum requirements, such as registration and public disclosure of certain corporate details. How would this be handled in a completely libertarian / anarcho-capitalist society?
And what are the pros and cons of corporations vs trusts as general vehicles for business? I mean, corporations are currently dominant, but in the nineteenth century trusts were dominant, and were only replaced by corporations because of government trust busting. So perhaps trusts are naturally better suited for business in general, in a fully free society.
There is also the question of recognition — a group of individuals may set up whatever contractually agreed entity they want, but will it be recognized in the business community (for example, will it obtain bank accounts), if it is set up with zero registration or public disclosure, etc.
Have you written about this topic?
PS
1. I meant “agents”, not “principals”, of course (in my previous email).
2. I found Norman Barry’s article The Theory of the Corporation very good and clear, too:
KINSELLA:
I’ll have to review this email in detail later but I think most libertarians are confused and I am not surprised Van Dun is. The best 3 I know are all non-lawyers, Rothbard, Hessen, and Pilon, but they all sense that the crux of the problem is the notion of respondeat superior. I discuss this various places in my book Legal Foundations of a Free Society (LFFS) and e.g. Corporate Personhood, Limited Liability, and Double Taxation.
It’s ultimately a matter of causation and responsibility, discussed in general in “Causation and Aggression,” ch. 8 of LFFS.
***
See some more comments below. Some of this I discuss in Corporate Personhood, Limited Liability, and Double Taxation. I would like to clean this correspondence up and post it on my blog, and it would be helpful to quote your queries–I assume you are okay with this. I can leave your name out unless you are okay with me using it. Let me know–
I’ve read Robert Hessen’s “In Defense of the Corporation” and found it excellent. I found it interesting that he disagrees with the notion that corporations are distinct entities, separate from the voluntary association of individuals (shareholders, board, executive, etc.) that makes up the corporation.
yes. That is a fiction created by the law, partly as an excuse to separately regulate and tax the corporation, with corporate income tax. As he shows, you don’t need a special statute or privilege from the state to have a business with a “name” or with perpetual duration; all this can be done by private contract alone.
Also interesting is his careful and insightful description of corporate liability for tort, distinguishing intentional and unintentional / negligence cases, and pointing out that principals (such as board members, executives, etc.) do not escape liability for their actions, i.e. cannot hide behind the corporate veil (though he doesn’t use this term).
Yes, most people who criticize limited liability are confused about what it means. It has nothing to do with board members or managers. It has to do with shareholders.
However, some legal scholars, such as Frank van Dun, do not think that limited liability entities are compatible with a natural order.
I adore Frank and he’s a genius, but in my view is he somewhat confused on some of these matters. He is very “European” in that he is somewhat of a legal positivist, in this sense: If there is a developed legal doctrine he assumes it’s legitimate–like trademark law and defamation law and blackmail, for example. Even though we libertarians can explain why these are unjust. He thus criticizes people like me and Walter for “libertarian legalism.” I.e, for being too libertarian. (See discussion of Van Dun’s criticisms in “Reply to Van Dun: Non-Aggression and Title Transfer,” and also in “Causation and Aggression,” both in LFFS.)
Same is true with the idea that someone the law arbitrarily classifies as an “owner” is “responsible” for torts of their “employees” (another government classification) [see e.g. The Over-reliance on State Classifications: “Employee” and “Shareholder” (Mises 2008); see also “Classificationism, Legislation, Copyright”]. So the shareholder “is” “an owner” and under respondeat superior he should be liable for the torts of “his” “employees.” Limited liability laws protect him from this liability so he and others see this as a legal privilege. I believe my libertarian friend Sean Gabb also agrees with Van Dun here, as do some of my other friends like Jeff Barr.
But as Rothbard, Hessen, and Pilon argue, there is no basis for employers necessarily to be liable for torts of employees; respondeat superior is rooted in feudalism and slavery notions—an owner or master is responsible for the actions of his slave or serf/servant. Moreover, there is certainly no libertarian case that shareholders should be liable, as they do not control the actions of the employees.
I’m curious if you have any further thoughts or refinements about how best to form legal entities in a completely free society where there is no authority regulating incorporation and registration of legal entities.
you would probably have a variety of private forms of business enterprise, probably something like a limited liability partnership or other forms like coops. There would be no “corporations” in the sense of a distinct legal personality, but the word corporation might continue to be used, and the word doesn’t matter.
Hessen is not an anarchist, but a minarchist, so he sees a role for government mandating certain minimum requirements, such as registration and public disclosure of certain corporate details. How would this be handled in a completely libertarian / anarcho-capitalist society?
Probably just by reputation and insurance and liability requirements.
And what are the pros and cons of corporations vs trusts as general vehicles for business? I mean, corporations are currently dominant, but in the nineteenth century trusts were dominant, and were only replaced by corporations because of government trust busting. So perhaps trusts are naturally better suited for business in general, in a fully free society.
I don’t know much about trusts. I think various legal forms of business organization can be done solely by contract, including homeowners’ associations, restrictive covenants that run with the land, trusts, partnerships, and just “companies” in general.
I think without state special statutes for example, clever lawyers and business people could do a trust or something like it. For example suppose I want to leave a trust to take care of my cat after I die. Now the cat can’t own anything so this is tricky. So what you could do is hire a company who does this, which has a reputation for safeguarding client money and doing what they instructed, even after death. So I give Trust Supervisory Co. A $100k with instructions to use it for my cat. What if, after I die, they choose to just spend the money, after all they own it, right? Well their reputation would suffer, number 1. And no. 2, if this became a real risk, then you divide control of the money, by hiring Co. B to make sure Co. A follows the trust instructions. You could basically donate the $100k to A and B as co-owners, where A has the basic ownership and right to spend it for the cat, but B has the right to seize the money and hire a new trust company if they can go to court and prove that A is misusing the funds. There are lots of creative ways to do this.
David Gordon has argued with me in private that wills are a problem because once you die you can’t then transfer ownership to your heirs since you don’t exist anymore. To me this is a trivial problem that clever lawyering can fix. For example, I would simply say that I give a standing order that “I hereby transfer all my assets to heir H one microsecond before my death.” David scoffs at this. But I mean anyone who has heard of infinitesimals would get my point.
Anyway even if this trick would not work, there are other ways you could do it. For example I could transfer ALL of my assets NOW to H, but then reserve a life estate—meaning I could use it as I see fit until I die. Then my life estate disappears and H‘s naked ownership now becomes full ownership. 1
OR I could transfer all my estate NOW to Postmortem Distribution Company A, but with contractual stipulations that (a) upon my death, they transfer it to H; (b) before my death, I can undo or modify the contract and transfer, if I want; and (c) during my life, I can use the property as I see fit. [I discuss this also in Libertarian Answer Man: The Efficacy of Wills]
There are lots of things that could be done with purely private arrangements. We just don’t do them because the state has swooped in with statutory forms that are more certain for lawyers to use given the fact that we have state courts who will respect state approved forms. This is one reason people use corporations now: it’s state-approved. It’s why most people do a statutory durable power of attorney, or a statutory will, rather than the old common law techniques which would technically work, but lawyers are conservative and if the state says THIS is the RIGHT way to do it and our courts will DEFINITELY respect THESE forms, then lawyers use those forms—it would be malpractice not to.
BTW you could use some of these above ideas to do things like neighborhood Homeowners Associations with restrictive covenants that “run with the land”. This is akin to the way you could make a “corporation” have perpetual duration without a special statutory legal privilege. You don’t need it. I believe Hessen goes into this a bit in his book.
The problem is Hessen, Pilon and Rothbard are not lawyers so their comments are incomplete and somewhat crude.
The other problem is libertarians don’t know the law very well so don’t come up with solutions like those above that easily occur to me both because I’m a practiced and sophisticated lawyer and also know deep libertarian theory. Almost no one else does. So some libertarians or critics of the corporation just see that limited liability is some privilege. They don’t get it. They don’t have a sophisticated understanding of causation and liability, nor of how private law solutions could work (since they have no experience with this, no imagination, and because the existing statist legal monopoly has crowded out natural private law solutions).
And yet another problem is that the lawyers who do or could know all this, don’t care, because they are not libertarians, and also, because as I said, they are conservative and risk averse and they just use the statutorily approved forms like incorporation, trademark registration, statutory power of attorney, statutory will forms, and so on., so they never learn about or explore or care about the way private law would or could “do the same thing.” They have zero curiosity.
So you are left with the handful of people who know both sides, like me (I really don’t know anyone else but there may be a few in the world), and even I am not gonna waste my time doing a legal treatise summarizing the hypothetical law that would organically emerge if the state got out of the way. It’s premature. (Some people have urged me to do this. It’s ridiculous.) It would be like me trying to draft an entire private civil law code from scratch. You can’t do it. You can’t predict what customs or or context of legal practices and doctrines would emerge to flesh out in a concrete way the abstract principles. I could take a modern codification of law, like the Louisiana Civil Code, or something else like the American Restatements of Law, and go thru them and highlight the parts I think are compatible with libertarian private law and cross out and amend the parts that are unlibertarian, but what’s the point of this? It would be navel gazing. I discuss some issues regarding this in my chapter 13 in LFFS, where I talk about abstract vs. concrete legal precepts—see e.g. p. 520.
There is also the question of recognition — a group of individuals may set up whatever contractually agreed entity they want, but will it be recognized in the business community (for example, will it obtain bank accounts), if it is set up with zero registration or public disclosure, etc.
correct.
Have you written about this topic?
here and there, as noted.
p.s.: Re Van Dun– was this the piece you had in mind? Or is there another one? Frank Van Dun, “Is the Corporation a Free-Market Institution?,” Ideas on Liberty (March 2003).
THIRD PARTY:
Very interesting, specially some of the parts about the Homeowners Associations.
We seem to all come to you when it comes to concrete legal matters about libertarianism. Going from philosophy to a more precise application of these principles raises many questions, and other than you (Randy Barnett is probably too conservative I guess) the list of people with legal expertise seams quite scarce.
GEVERS:
Thank you very much for your detailed response, Stephan.
Just to be clear, I do not expect you to be so generous with your time — though of course, I’m very grateful to you.
What you wrote makes sense to me and is aligned with my own views.
Essentially, given a sufficient experiential base, and using a consistent reasoning process to logically integrate that experience, one can induce the principle of individual sovereignty, which is the foundation and cornerstone of natural law.
From this foundational principle, everything else — the entire body of natural law — follows.
Just like the entire corpus of Austrian law follows from the fundamental principle of human action (as defined by Mises and Rothbard). (By “follows”, I do not mean that the corollaries are obvious, or that they can be mechanically deduced in a rationalistic, non-empirical manner. Rather, it requires deep experience and deep thinking — logical integration of experience — through an integrated process of both inductive and deductive thinking.)
Incidentally, this is also, essentially, Frank van Dun’s view. In fact, his magnum opus, The Fundamental Principle of Law, is about this. (The text is in Dutch, which I can read, but you can use Google Translate or ChatGPT to translate it to English for you.)
He discusses his reservations about limited liability corporations in two articles:
In my reading, he essentially agrees with Robert Hessen (and you and me), though his sentiment is more negative than Hessen’s.
I also found his article about the foundation of a natural order insightful:
His homepage has a wealth of good articles, books, etc.:
Yes, feel free to quote me in your planned blog post.
- On naked ownership, see Louisiana Civil Code art. 478; and Gregory Rome & Stephan Kinsella, Louisiana Civil Law Dictionary (Quid Pro Books, 2011). [↩]
