Are corporations creatures of the state? — VOICES for REASON

In Citizens United v. FEC, the recent campaign finance case I discussed here and here, the Supreme Court noted that one of the arguments for restricting corporate speech is that “[s]tate law grants corporations certain advantages–such as limited liability, perpetual life, and favorable treatment of the accumulation and distribution of assets.” According to this line of argument, corporations are “creatures of the state” and they give up any claim to First Amendment rights in exchange for special state-granted favors.

In answer to this argument, the Court quoted a dissent by Scalia from a previous decision: “It is rudimentary that the State cannot exact as the price of those special advantages the forfeiture of First Amendment rights.”

The Court, which admirably upheld the free speech rights of corporations, took it for granted that corporations wouldn’t exist save for special favors from the state. It’s a common view of corporations. But it’s one that must be questioned.

There’s reason to think that all of a corporation’s essential features–”corporate personhood,” perpetual life, and limited liability–could arise by voluntary agreement among individuals on a free market, without a single government favor. Consider what many regard as one of the most controversial features of a corporation, limited liability.

Limited liability refers to the fact that a shareholder’s responsibility for the corporation’s debts is limited only to the amount of his investment in the company. Under limited liability, if you own a share of XYZ Corp’s stock and the company goes under, XYZ’s creditors can only go after your investment in the company, not after your personal assets. But that need not be a favor from the state. On a free market, a company could put a clause into its contracts stipulating limited liability, which anyone it dealt with would be free to accept or reject.

To be sure, there are difficult issues that would need to be thought about, such as how limited liability would apply in the case of torts. But free market answers to such questions are possible, and deserve to be discussed and debated. To wrestle with these kinds of issues, however, we’ll need to start from a premise that is totally alien to most commentators today: that free individuals can come up with innovative solutions to political and economic problems.

Image: flickr