Belligerati

Richard Booth, in his article THE MYTH OF LIMITED LIABILITY, argues that limited liability is no longer necessary to archive a functioning stock market. He claims that the prospect of suffering a loss beyond an initial investment is untenable without some ability to control the outcome.
He says:

That may once have been so. But today, most investors are well diversified. They can easily absorb losses from one portfolio company, because there will always be others that do better than expected. If we did away with limited liability for publicly traded companies it would not likely affect the market at all.

That speaks to my article on diversity and Enron from Monday. But my assumption in that analysis was that your liability in investing in Enron was limited to the initial investment. This is not so without limited liability.

Partnerships and single proprietorships (think of them as partnerships with one partner) are the dominant form of business organization without limited liability. Partnerships have joint Liability. This means that they share in the liability for the actions of the partnership. This would be for capital markets, but likley not fatal. In the event debt greatly exceeded the assets of the firm, individuals could be on the hook for substantial obligations. On the other hand, they'd owe it to banks, bond holders, and the like, so highly diversified investors could pay for their miniscule share of the debt out of their gains from other inevestments. In most circumstances of bankrupcy they would owe very little and if persuing individual investors would be costly, they'd get off scott free. On the other hand, if limited liability is truely ammoral, then maybe we should require even small investors to put money in escrow to cover their liabilities. Of course now we'd have to brace ourselves for all the resulting lawsuits about who really owns stock and when they owned it. Not a fatal change, but certainly an ugly one.

However, in many states partnerships also have joint and several liability. This includes, among others, New York, Deleware, and California. Navada, for example has only joint liability. That means that not only do the partners share in the liability, but if any one cannot pay, the others may be pursued for the entire amount. In this situation wealthy indivuals, big mutual funds, large private charities, and insurence companies would be hounded for the excess liabilities of the firms they own simply beacuse they have deep pockets. Diversification wouldn't help you here. Instead you'd encourage elaborate legal structures designed to mask stock ownership. You would also ensure that employees never wanted own their own firm's stock.