Limited Liability and the Corporation

Abstract

Limited liability is a fundamental principle of corporate law.Yet liability has never been absolutely limited.Courts occasionally allow creditors to "pierce the corporate veil," which means that shareholders must satisfy creditors' claims."Piercing" seems to happen freakishly.Like lightning, it is rare, severe, and unprincipled.There is a consensus that the whole area of limited liability, and conversely of piercing the corporate veil, is among the most confusing in corporate law. 1 We argue to the contrary that economic analysis-in particular the theory of the firm and the economics of insuranceexplains the legal treatment of limited liability.Both the rules and the exceptions serve valuable functions.