The essential defining characteristic of a corporation, as against
other ways of organizing a business enterprise, is liability
limitation, a conspiracy between the proprietors and the state to
defraud tort claimants of all they might otherwise obtain in redress
for their injuries. It’s pure Hamiltonian Social Engineering,
Mercantilism at its worst. The idea is to encourage investment by
limiting the risk. But by limiting responsibility, investment is
distorted away from the individual integrity that is the sine qua non of enlightened self-interest. The limited liability corporation is the rope by which Capitalism hung itself.
I agree with Greg that limiting liability is an essential aspect of the corporation. I had left that out when I said:
The essential defining characteristic of a corporation is that it is a voluntary association of individuals (stockholders, directors, officers, employees) under a complex hierarchy of agreements, contracts, policies, authority, responsibility, and accountability. It conducts business, voluntarily, with clients of all sorts. Yea, it’s a legal construct too. So is marriage, but marriage can hardly be defined as essentially nothing more than a state-recognized contract.
The thing is, I’m not convinced that limited liability for stockholders is incompatible with fee-market anarchism, i.e., a free-market system where all the players police themselves and each-other by mutual consent.
What this comes down to is a simple question: is it ethically permissible for an individual (or business) to invest in some other business enterprise, i.e., own a part of it, and not be held liable if that corporation later cause injuries or damages, the value of which exceeds the liquidated asset value of that corporation? For example, you own stock in GM. GM builds a car with a defect that reasonably should not have been. That car ends up killing thousands, and the trickle-down damages end up being more than GM is worth. Should you have to write a check proportionate to your share of the company in order to make up the difference?
If not, why not? After all, as a stockholder, you’re an owner. You take part in selecting the Directors who run the company. Should you not then be held responsible for its wrongdoing?
On the other hand, in a free market, the stock market would still exist. Investment in business enterprises would exist on the open market (publicly traded). Limited Liability is a valuable product. People are going to want it, but can they legitimately have it without imposing limited recourse on others should they be damaged?
Corporations exist not only to limit liability, but to create a separate and distinct entity ("legal" is superfluous) which simplifies things. For example, let’s say that you want to buy a car from GM, and instead of signing a sales contract that’s also signed by a single representative of the corporate entity, it has to be signed by the millions of "partners" who together own GM. In practical terms, that would not happen anyway, but it gives you a sense of how difficult things could be without the business structure provided by the corporate entity concept.
Of course, there are ways to organize complex businesses without affording limited liability to investors. Lloyd’s of London is one such company. Investors worldwide are liable for the damages the insurance company has to pay down to "their last pair of skivvies," as I once had a Brit tell me. However, for the last 10 years, Lloyd’s is evolving to a limited liability model, in part because unlimited liability was forcing huge numbers of its "Names" into bankruptcy.
So, I really don’t have a complete answer. All I know is that personally, I would have no problem in the world recording a general statement certifying my willingness to accept my own risks and consequences beyond the value of any corporation with which I interact. Of course, that leaves those who’d not be willing, as well as 3rd parties who are injured outside of any business dealing with the entity.
Guess I’ll have to give it more thought. My gut feeling is that corporations exist and provide limited liability because it makes a lot of sense in a lot of ways. I’m unconvinced that some equivalent would not exist were it not for the state.
I also reject completely that limited liability on the part of shareholders implies any sort of slippery slope with respect to the propriety with which things are run. There are plenty of market mechanisms to ensure that public corporations are well run. And, moreover, they are well run. As for non-public corporations, well, the notion of limited liability there is a complete fiction and fantasy. If you own shares in a non-publicly traded corporation, you are likely to face liability if push comes to shove.