How Corporations Limit their Liability

The nature of the corporation is protection from liability. This is why the United States government originally chartered the railroad companies who were seeking protection from their actions. They were chartered as “corporate” bodies and granted the privilege and market advantage of “limited liability”.

It is an interesting accomplishment, since the Revolutionary War was in part based on opposition to the monopolies of the trading companies which had been granted incorporation from the King of England. It didn’t take long for our government to forget this and continue the same practices on our own shores, much as we also did with the “income” tax.

Although this “limited liability” applies to the corporate body in general, it has been defined through the courts to extend to the inner workings of the corporation itself, including its chief officers and board of directors. Unless it can be proved that specific officers willfully and knowledgeably committed illegal acts that caused harm and injury, courts have usually supported this extension of limited liability to protect those working within the corporation and also the stockholders.

Corporations themselves can face liability, such as the John Mansville asbestos case and the recent Phillip Morris tobacco injury suits, but this in no way threatens the “limited liability” coverage and again rarely affects those who were working within the company at the time even if they were responsible for the decisions that led to the court case.

John Mansville is a good example of the use of “limited liability”. In 1982, a verdict was reached against the Johns Mansville Corporation, in favor of workers who were suing for health related issues while working with asbestos. The were awarded $150,000. August of that same year, John Mansfield filed for bankruptcy to avoid payment. In 1986, they reestablished their company as Schuller Corporation. The limited liability does not extend beyond the assets of the corporation. Any excess liability must be burdened by others.

What is known as the “corporate veil” protects board directors from prosecution and resulting liability in cases such as these. It is extremely difficult to pierce this veil and hold these directors and officers responsible for harm and injury that could possibly imprison the average citizen guilty of making the same decisions in a non-corporate situation. Corporations have used their impressive law arsenals to reinforce and strengthen this protection through the courts. For a country that prides itself on equal application of our laws to all citizens, “limited liability” in an interesting study in whether this ideal is just that, an ideal.