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I've always been confused by this. Apparently, as I understand it, you can register a company for a small sum of money in Western countries, for example the USA or Sweden, which then become its own "person".

That is, no matter how grossly you mismanage it, it's the company that will take on debts -- not you (or your co-founders) personally. So even if you spend like crazy with the company's money/loans, and then can never pay it back, you can just "fold" the company (shut it down) and you, the actual human being, goes free to start another company, with zero debt/jail time. And whoever lend you money is stuck with no way to get it back.

This always seemed crazy to me. As if the system was created specifically to encourage all sorts of abuse and reckless behaviour.

What is the reasoning behind this, if true? Why don't they make the humans who started/own the company personally responsible for the company's debts? How can they just go: "Oh, you lost a few million on this business? You could never repay it? Not a problem! We'll just fold the company and 'write it off'. Done! Have a great day! By the way, would you like to start another one while you're here?"

Something tells me that it can't be like that. If so, why would anyone ever have a company that is tied to you personally? It's not like the amount of money required for an "Aktiebolag" or "AB" ("stock company" in Sweden), currently 25,000 SEK, is a massive amount of money. So as long as you have that amount, you never have to worry about any financial problems with your company because it will never affect you personally?

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    How is this a personal finance question? And why do you assume a company with no credit history can just get loans like that and keep defaulting on that? They can no more do it than an individual. If they default, they will be creditors who are entitled to the liquidated assets of the company. If there are no assets, it is pretty much the same as an individual declaring bankruptcy. You don't need a company to do that.
    – JohnFx ♦
    Jun 21, 2021 at 1:27
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    @JohnFx I see it as being in scope (1) from the standpoint of an individual deciding whether to form a company ("When to incorporate to protect your work or assets") and (2) from the standpoint of an individual investor concerned about the logistics and consequences that apply if a company, whose stocks or bonds they own, spends excessively or is "looted".
    – nanoman
    Jun 23, 2021 at 22:44
  • It kind of is designed to encourage reckless behavior. Reckless behavior like "I'm going to build a skyscraper... oops nobody wants to rent it because it has a mold problem", not reckless behavior like "I want a new car". Big projects that nobody would risk their own individual money on.
    – user253751
    Jul 5, 2021 at 16:55

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A small business' bank loans and credit cards all require a personal guarantee by the owner, in addition to the business' promise to pay.

Large businesses can get a loan with no personal guarantee. In this Inc.com column, an entrepreneur with tens of millions of dollars of annual revenue celebrates his new loan that had no personal guarantee requirement.

As for the company's money, anyone investing money in the business should be sophisticated enough to take measures to protect themselves from misuse of funds. The first and most important measure is to only invest with trustworthy, proven, talented business owners.

Last, the moral issues that you raise were used to argue against bankruptcy law changes in the past, that the changes were too favorable to debtors. These arguments failed to stop the changes.

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In the UK, there’s an offence of “trading while insolvent”, and the directors of a company that keeps trading when they should reasonably know that it can’t repay its debts can become personally liable for those debts. Other countries have similar provisions.

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  • But since small companies only have to file accounts once a year, showing that someone knowingly traded while insolvent is almost impossible.
    – Simon B
    Jun 21, 2021 at 21:11
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Bankruptcy fraud with limited liability companies does indeed happen a lot. However having a limited liability company in almost all jurisdictions comes with a lot of rules. So you are not allowed to just spend the money in a limited liability company anyway you want. Or manage or mismanage it anyway you want. But indeed due to outdated rules and often lax enforcement bankruptcy fraud is a good way to enrich yourself for business-savy unscrupulous people.

As for question why allow limited liability companies in the first place. The reasoning behind that is that limited liability encourages people to start businesses and take on risks with them when necessary, which in turn is good for the economic activity in society as a whole.

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