An Analysis of Limited Liability Companies, Risk, and Societal Effects

This essay provides a comprehensive analysis of Limited Liability Companies (LLCs) and the arguments against the assertion that their structure encourages excessive risk-taking, which negatively affects society. The essay argues that various factors, including strict reporting systems, the doctrine of piercing the corporate veil, the taxation of LLC income as personal income, compliance with legal regulations, and the implementation of corporate social responsibility (CSR) principles, mitigate the potential for excessive risk. The essay discusses the role of annual reports, the accountability of members, and the ethical considerations that guide business decisions within LLCs. The conclusion reinforces that the structure of LLCs does not inherently lead to excessive risk-taking, highlighting the various safeguards in place to protect stakeholders and society.

Running head: BUSINESS 0
Business

BUSINESS 1
Introduction
A limited liability company or LLC is referred as a corporation in which the members are
responsible for its debts up to the amount of capital that they invest. In other words, members
cannot be held personally liable for debts or liabilities the company (Tricker, 2011). This
essay will provide arguments against the statement that the ability to create an LLC leads to
excessive risk taking which negatively affects the society. In this context, excessive risk-
taking means members of the company are more likely to take business risks that are not safe
for the corporation or society in order to get substantial returns. The negative impact on
society includes factors such as high risk of fraud by the members, high chance of loss
suffered by shareholders, members are more likely to take rash business decisions, risk of
unethical behaviour of members, and others (Ireland, 2010). Society includes different
stakeholders that are directly affected by the actions of an LLC such as public, shareholders,
employees, government, creditors, investors, and others. The ability to create an LLC did not
encourage its members to take excessive risks that negatively affect society because various
laws and moral values bind them. This essay will discuss the role of the doctrine of piercing
the corporate veil, moral values, stringent reporting, transparency, accounting requirements
and others to argue why the ability to create an LLC did not encourage members to take
excessive risks.

BUSINESS 2
Arguments (Against)
A limited liability company is required to comply with a strict reporting system which
enforces its members to continuously submit company’s reports to government authorities
which reduces the risk of excessive risk-taking. In limited liability companies, members did
not have unlimited powers to do anything that they want in the firm. They are continuously
under pressure to submit different reports of the enterprise to various parties such as
shareholders, government, and public which assist them in reviewing their work (Luchs, et
al., 2010). For example, the key document of LLC includes its annual report which includes
crucial data regarding the organisation. The annual report includes tax report, management
report, directors’ report, franchise tax report, and others. It includes the statement of overall
revenue and operating expenditure of the enterprise that assists shareholders, government and
public in evaluating the company’s annual performance (Lehavy, Li and Merkley, 2011). The
director report includes statements from the directors regarding the performance of the
enterprise and the actions taken by them. Other than the annual report, LLCs submit various
other reports to its shareholders and government as well for ensuring that it complies with
necessary legal requirements. These reports enable shareholders, government and public to
review the work of members, and they can hold them accountable for their action. Therefore,
due to the continuous scrutiny of their work, members did not take excessive risks that might
negatively affect the society.
The doctrine of “piercing of the corporate veil” enables the court to avoid the provision of the
separate legal entity and hold the company’s directors liable for their actions which ensure
that they did not take excessive risk-taking that can negatively affect the society. The piercing
of the corporate veil is referred as a situation in which the court set aside the principle of the
separate legal entity. The provision was given in Salomon v A Salomon & Co Ltd case in
which the court provided that a person operating a company cannot be held personally liable
for its liabilities (Lawson, 2015). The corporate veil protects members in an LLC, but the
court uses doctrine of piercing the corporate veil to hold company’s members personally
responsible for firm’s debts or liabilities (Macey and Mitts, 2014). Generally, courts have a
strong presumption against the use of the doctrine of piercing of corporate veil and it is only
applied in case of serious misconduct. The provision of veil piercing was introduced because
directors misuse their power to take excessive risk in the company that negatively affect the
interest of shareholders, creditors and society. Directors often misuse their position since to

BUSINESS 3
take excessive or absurd risks in the organisation that negatively affects the interest of
creditors. In case of LLCs, the provision of limited liability can encourage directors to take
extreme risks for smaller returns that adversely affect the interest of creditors (Huang, 2012).
In such case, the court can pierce the corporate veil and hold directors personally liable for
their actions. The court pierces a corporate veil in various cases, for example, when there is
no separation between the firms and its owners, wrongful or fraudulent actions by directors,
or in case creditors suffer unfair loss.
The income of an LLC is taxed as the personal income of its members; therefore, members
are not encouraged to take excessive risks as it negatively affects their income as well. An
LLC’s owners are known as members, and they are taxed as sole proprietors which mean that
the income generated by the LLC passes through to its members’ personal income. This
provision removes the risk of double taxation and allows the members to pay tax on
company’s income (Jelsma and Nollkamper, 2017). Members of an LLC are required to
comply with a number of regulations in order to ensure smooth working of the enterprise. For
example, in the United States, the regulations relating to limited liability companies differ
based on states. The government implemented strict policies for limited liability companies in
order to ensure that the members did not misuse their position and take excessive risks that
lead to negatively affecting the actions of the society. Taking uncalculated risk negatively
affects the income of an LLC’s members as well which discourage them from making a rash
business decision (Djelic and Bothello, 2013). The members also face the risk of losing their
capital which they invest in the firm in case they take excessively risking decisions.
Therefore, they are less likely to take risky business decisions which might result in
negatively affecting the interest of society.
In case of limited liability corporations, members are required to comply with a number of
strict legal regulations which ensure that they are performing their duties ethically which
discourage them from taking risky business decisions. An LLC has to comply with different
legal requirements such as an operating agreement with suppliers, buy-sell agreement, profit
distribution structure, changing tax status, and others. Effective compliance with these
regulations ensures that members are performing their task ethically, and they are taking
calculated risks rather than rash business decisions (Dammann and Schundeln, 2012).
Members are accountable to report the performance and actions taken by them that affect
shareholders, creditors, employees and public. Although the statutory audit is not mandatory
for an LLC, most of the firms conduct them to get taxation and loan benefits. It also assists

BUSINESS 4
them in increasing the number of shareholders since investors prefer to invest in the
corporations that conduct a regular audit of their accounts (Williams, 2012). Many countries
are mandatorily applying the principles of corporate social responsibilities (CSR) over
corporations which require its management to think morally while taking a business decision.
An effective CSR model ensures that the management of an LLC takes into consideration the
interest of each stakeholder while taking a business decision which avoids excessive risk-
taking decisions (Hiller, 2013). Therefore, these policies ensure that the members of an LLC
did not take excessive risks while operating their business which might negatively affect the
society.

BUSINESS 5
Conclusion
In conclusion, members of a limited liability company cannot be held personally liable for its
liabilities or debts. The lack of liability did not encourage members of an LLC to take risky
decisions because of various factors. Members are required to continuously update
stakeholders by issuing different reports of the company which enforces them to take
corrective actions. The reports are easily accessible to LLCs’ stakeholders, and members are
required to justify their decisions and performance of the company in the report which
discourage them from taking risky decisions as their actions are being monitored. The
doctrine of piercing of corporate veil also discourages members to misuse their powers and
take risky decisions that may negatively affect the society. In this doctrine, the court can
pierce the corporate veil and held members personally accountable for company’s liabilities
or debts. Taking excessively risky decisions negatively affect the capital of members as well
along with the society; therefore, they are less likely to take rash business decisions when
their money is at stake. Strict government regulations also discourage members from taking a
risky business decision that might negatively affect the society or shareholders of an LLC.
Therefore, it is not correct to say that the ability to create an LLC leads to excessive risk
taking which negatively affects the society.

BUSINESS 6
References
Dammann, J. and Schündeln, M. (2012) Where Are Limited Liability Companies Formed?
An Empirical Analysis. The Journal of Law and Economics, 55(4), pp.741-791.
Djelic, M.L. and Bothello, J. (2013) Limited liability and its moral hazard implications: the
systemic inscription of instability in contemporary capitalism. Theory and society, 42(6),
pp.589-615.
Hiller, J.S. (2013) The benefit corporation and corporate social responsibility. Journal of
Business Ethics, 118(2), pp.287-301.
Huang, H. (2012) Piercing the corporate veil in China: Where is it now and where is it
heading?. The American Journal of Comparative Law, 60(3), pp.743-774.
Ireland, P. (2010) Limited liability, shareholder rights and the problem of corporate
irresponsibility. Cambridge Journal of Economics, 34(5), pp.837-856.
Jelsma, P.L. and Nollkamper, P.E. (2017) The Limited Liability Company. New York City:
LexisNexis.
Lawson, T. (2015) The modern corporation: the site of a mechanism (of global social change)
that is out-of-control?. In Generative Mechanisms Transforming the Social Order (pp. 205-
230). Springer, Cham.
Lehavy, R., Li, F. and Merkley, K. (2011) The effect of annual report readability on analyst
following and the properties of their earnings forecasts. The Accounting Review, 86(3),
pp.1087-1115.
Luchs, M.G., Naylor, R.W., Irwin, J.R. and Raghunathan, R. (2010) The sustainability
liability: Potential negative effects of ethicality on product preference. Journal of
Marketing, 74(5), pp.18-31.
Macey, J. and Mitts, J. (2014) Finding order in the morass: The three real justifications for
piercing the corporate veil. Cornell L. Rev., 100, p.99.
Tricker, B. (2011) Re‐inventing the Limited Liability Company. Corporate Governance: An
International Review, 19(4), pp.384-393.

BUSINESS 7
Williams, R. (2012) Enlightened shareholder value in UK company law. UNSWLJ, 35, p.360.