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Question

This discussion board is open for any questions or comments in a new thread, but please address the following:

1. Should we allow business to be conducted with limited liability entities? This arrangement obviously benefits investors, but does it harm society? If so, how? Many corporate scandals are caused by the separation of ownership from management. Investors own companies, but executives manage them. Investors are said to "vote with their feet", meaning that if an investor doesn't like what a company is doing, she sells her shares and takes her money elsewhere, rather than voting to change the conduct of the business. It is easier to pick up and move on than it is to get involved and organize change within a large company. The fact that publicly traded companies may be owned by hundreds of thousands of small investors with only a few shares of the company each means that most of those investors cannot practically participate in the management of the companies in which they invest. If limited liability was eliminated, investing in this manner would be extremely risky, as your personal assets would be at risk from the liabilities of each company you invested in. How might this change business ownership? What impact would this have on society?

2. Should we ever create "partnerships by estoppel"? Why or why not?

Explanation / Answer

1. No, business shouldn’t be allowed to conduct with limited liability entities because it does harm society. Many companies are formed and run not only for profit but for bridging some gap in the requirement of customers or society. When owners are liable to take accountability for how businesses are being run and what to do to make sure that business is running healthy then only society will get benefits from the company.

And why society’s harm/benefit is being linked to the companies? Because companies get lots of rebates, tax benefits or other leverages from the government which indirectly collects all the money through taxes. Society runs government indirectly. Apart from this the amount of trust society shows in some companies could get a direct hit if the company fails to perform or match the expectations of their immediate customers.

A lot of companies have taken society’s information for granted and vanished the privacy on their own terms. Many social media sites have done the data breach. Even companies in consumer sectors have taken society for granted and broken their trust so that they can increase their profit or by not informing them that they are degrading the quality of products because they’re not able to generate profits. In such cases, society has to take a toll on trust due to inefficiencies of such businesses. And main concern is that owners are not liable for any type of situation which could lead to bankruptcy or similar issues in the business. Wherever in partnerships, at least one owner has to be liable for the actions of the business.

As per the Business Week report, many CEOs stash their assets in limited liability entities to save their assets whenever they’re under indictment. Similarly, in case of nuclear power plants, owners try to put them under limited liable entities so that they can prevent themselves in case of any major accident like gas leakage, dangerous accidents etc. from the general public.

In the 1990s in the US, people were trying to form limited liability entities to attract investments and it resulted in a dubious reputation.

But now the case comes what if the limited liability is eliminated?

In such cases, if the company gets bankrupt then investors will take a direct hit on whatever they have invested. This is something where limited companies save the investors interest. I would like you to give a different perspective here. In corporations, unless an investor owns a substantial amount of share, there is zero saying on management decisions. In such cases, small investors are only able to read the financial reports and take their investments. On the other side, in limited liability entities, due to new existence and protection of investments, investors can participate in management decisions. Now the case is harmful to society and what could be done. Following parameters should be considered to change business ownership and accordingly impact on society:

Flexibility in changing your company’s structure so that it can support growth and change.

Liability should be designed so that creditors and customers can sue the company but the same time should not be able to gain access to assets. Law and tax protection should be considered accordingly.

Control of company should be designed to for the betterment of the company’s growth and it could be a board of directors of an individual person.

Licenses, permits, and taxes are other important parameters to consider while designing the business ownership.

Corporate governance, corporate social responsibility, information transparency, multi-stakeholder business approach, and knowledge transfer are the areas which can directly impact society. Companies are engaged in environmental and social causes these days and it’s their responsibility to take strict actions when their products are harming society. Environmental scandal by Volkswagen, Amazon not paying workers for overtime work, Nestle’s Maggi scandal, and Yum! Serving tainted meat to their customers. These are few examples where companies harmed the society and actions were taken against them because they are corporations and not limited liability entities. Considering such cases, companies should design business ownership so that they could not harm the society and keep the investors’ confidence.

2. For big corporations, we should avoid creating partnerships by estoppel because it could take a toll on the confidence of all the business transactions to be done in the name of that partner. Sometimes false representation could happen in such cases. There is also a big risk on a person saying that he/she is a partner in terms of liability.

Whereas in the case of new firms, partnerships by estoppel could benefit the firm. It’s very for new firms to get an investment sometimes from banks or financers but when partnerships by estoppel come into picture then new firms can easily get financed from big financial institutions.

So, the applicability of partnerships by estoppel depends on the type of company we’re considering for the same.

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