R.J. Rushdoony’s penetrating critique of limited liability remains hidden to many people. His case against limited liability is found in two places: in his book, Politics of Guilt and Pity1 and in The Institutes of Biblical Law, Vol. 1.2 What is hidden from many people are the reasons for his stand against limited liability laws. Not that Rushdoony hid his views at all; it’s just that some people fail to follow the links Rushdoony himself provides.
Rushdoony’s view on limited liability has its critics. In this essay, I review Rushdoony’s arguments, then consider them against some of the criticisms that are leveled against his conclusion, that limited liability laws are wrong.
There are two components to Rushdoony’s criticism of limited liability. One of these is the direct consequences that limited liability has on commerce. The second component is the morality of the legal implications of limited liability. He writes, “The first effect of limited liability was the progressive separation of ownership from responsibility, of management from property.”3 Thus, for Rushdoony, limited liability is intricately tied up with property ownership and responsibility. He does not mention profit, but that does not mean he does not have it in view. We’ll find out why shortly.
Rushdoony’s second criticism of limited liability identifies a broader economic consequence. “Second, limited liability has, in the long run, assured a greater readiness by corporations to assume debt.”4 Now it is necessary to read Rushdoony more widely to identify why he would speak against debt.5 Rushdoony objects to limited liability on the grounds that it contributes to valueless paper currency and fractional reserve banking, the two leading tools that devalue the currency through monetary inflation. And fractional reserve banking does not work unless people are willing to go into debt and borrow.
For Rushdoony, limited liability and capitalism are foreign concepts. “[I]t can be argued that the limited liability company destroyed capitalism … Capitalism and limited liability are alien concepts.”6 The essence of capitalism is property rights, free trade, and contracts that are mutual agreements by the signatories to the contract. Limited liability, as we shall see, steps into the marketplace and imposes conditions that are not freely chosen.
Dr. Rushdoony continues, “But socialism begins at home, and the significant and neglected step towards socialism was limited liability. The end of limited liability is unlimited money—and unlimited disaster. Before there can be a hard money policy, there must be a hard and fast responsibility. The alternative to hard money is finally a hard dictator, and disaster.”7 In other words, for Rushdoony, limited liability is at the center of the breakdown of Christian property ownership as it is being replaced by the socialist network of government control. He provides his own summary of limited liability laws in his Institutes:
A limited liability company is one in which the liability of each shareholder is limited to the amount of his shares or stocks, or to a sum fixed by a guarantee called “limited by guarantee.” The purpose of limited liability laws is to limit responsibility. Although the ostensible purpose is to protect the shareholders, the practical effect is to limit their responsibility and therefore encourage recklessness in investment. A limited liability economy is socialistic. By seeking to protect people, a limited liability economy merely transfers responsibility away from the people to the state, where “planning” supposedly obviates responsibility. Limited liability encourages people to take chances with limited risks, and to sin economically without paying the price. Limited liability laws rest on the fallacy that payment for economic sins need not be made. In actuality, payment is simply transferred to others. Limited liability laws were unpopular in earlier, Christian eras but have flourished in the Darwinian world. They rest on important religious presuppositions.8
For Rushdoony, limited liability laws come out of man’s inherent desire to escape the consequences of his actions. For him limited liability and irresponsibility go hand in hand.
Limited Liability as Theft
Even what has been said so far does not fully explain Rushdoony’s antagonism to limited liability. For at the heart of limited liability laws is the eighth commandment—thou shalt not steal (Exod. 20:15). To buy goods on credit and then not pay for them is theft. It really is that simple. This is why the repayment of the debt is governed by the laws of restitution. Failure to make restitution is sin, according to the Westminster Larger Catechism (Q. 141). Once payment has been withheld beyond the due date, the words of the Catechism kick into place: “What are the duties of the eighth commandment?” One of the responses is “restitution of goods unlawfully detained from the right owners thereof.”
In other words, limited liability encourages and supports disobedience to God by enshrining in the law the idea that making full restitution is unnecessary. This is the foundation to Rushdoony’s connection between limited liability and socialism: “Restitution as a principle is thus alien to a democratic society, because it is a theocratic principle which requires that man conform to an absolute and unchanging justice.”9 Limited liability laws are an attempt to thwart God’s justice in real time.
Background to the Argument
Dr. Rushdoony relies on a nineteenth century publication by George Sweet, Limited Liability: Observations On the Existing and Proposed Rules For Ascertaining the Debtor in Mercantile Dealings (185510) for his legal understanding of limited liability. Sweet, a barrister at law, explores the legal issues around the question of determining who is the debtor in business transactions. Here’s a summary of some of Sweet’s key arguments in his presentation against limited liability.
It comes as no surprise that Sweet would link the question of debts (i.e., losses) to the question of profits. Profit and loss have a direct correlation to one another, according to Sweet. “A trader with limited or no liability is, like a corporation, an anomaly incapable of existence under any system of laws which does not make express provision for it.”11 In other words, limited liability does not exist unless special provision is made for it. Who, then, is responsible for debts? Liability for debts is the express privilege of those who plan to collect the profits. “A little consideration will allow us to see, that the notion of sharing in the profits of a trade, with exemption from the duty of paying for the trade debts, could not possibly be recognized in the growth of the unwritten, judicial or common law of a state; and, therefore, that no system of law needs to contain, or can logically contain, any prohibition of such trading.”12 For Sweet it is a matter of law and of logic that liability can be stepped around by those who plan to collect the profits. It can’t be done, he says. It is an “anomaly” to suggest there is a business person or corporation that has limited or no liability.
Does this mean that partners cannot agree among themselves who might be liable for their joint debts? No. Partners, i.e., joint stock holders, might well contract among themselves that one partner (A) will be liable for all the debts thereby limiting the liability of partner (B), while both (A) and (B) share in the profit. But what they cannot do is contract among themselves to pass off their debts to someone else without that person’s agreement. Now unless the supplier of goods or services is informed about this arrangement and he agrees to trade under those terms, the business trader cannot have foisted upon him a financial deal of which he was ignorant. Thus, “A creditor’s right of resort to the person who has incurred the debt, is a right which the law gives him invito debitore, and therefore is a right that cannot be limited without the creditor’s consent.”13
Here we arrive at one of the criticisms of Rushdoony’s view of liability. There is nothing wrong with limited liability laws, it is suggested, because people know what the legal status is and they do business on that basis. In other words, if you do business with a limited liability company that then owes you money, don’t complain when you can’t get to the shareholders to get what is yours.
Meanwhile, hear Sweet again: “All that can be imputed to the law, is that it declines to hold (C) bound by terms to which it is not shown that he assented.”14 Can it be said, though, that the people “assent” to limited liability simply because an act of Parliament or Congress creates those laws? Such a view would require an abandonment of God’s law as the standard for the people and substitute in its place a theory of social contract. “The people elected us to make laws. We make laws. Therefore the people assent to all the laws we make.”
But you cannot give away via the ballot box that which is not yours to give away. You cannot use the ballot box as an excuse for bad or wrong laws. You cannot give away God’s law concerning personal responsibility, accountability and liability and replace it with something else. Hence, A.A. Hodge, “And if Christ is really King, exercising original and immediate jurisdiction over the State as really as he does over the Church, it follows necessarily that the general denial or neglect of his rightful lordship, any prevalent refusal to obey that Bible which is the open law-book of his kingdom, must be followed by political and social as well as by moral and religious ruin. If professing Christians are unfaithful to the authority of their Lord in their capacity as citizens of the State, they cannot expect to be blessed by the indwelling of the Holy Ghost in their capacity as members of the Church.”15
The idea that you go into business with your eyes open and take the consequences is not an argument against Rushdoony’s view of limited liability at all. It’s simply a reminder of the flip side of caveat emptor—let the buyer beware. In this case, let the seller beware.
In Australia, though, many suppliers now insist on personal guarantees from directors before they will supply on credit terms. This does not always work in the supplier’s favor, for the larger corporations with plenty of economic leverage will refuse to sign personal director’s guarantees. Which means that you are left to do business with a limited liability corporation under duress—coercion. The situation is forced upon you by the legislative conditions. Directors’ guarantee certainly works for the larger corporations who will insist on getting these from those they supply on credit, but may not give director’s guarantees to those from whom they purchase.
This argument, however, hardly proves Rushdoony is wrong about limited liability. All it does is recognize a long-held legal tradition that contractual conditions are only conditions by mutual agreement. Rushdoony is not arguing for pragmatic dissent to the idea of limited liability, or pragmatic consent to it. Rather, he is laying down a foundation based on the law of God that limited liability is, in principle, immoral. This is why he addresses the issue in the context of the Ten Commandments. “[I]n Biblical law, the offender is guilty before God (and hence restitution to God, Num. 5:6–8), and before the offended man, to whom he makes direct restitution …”16 (A) and (B) might well get together and limit their mutual liability to one or the other. But what they cannot do is transfer the liability of the debts to Dave on the other side of town without Dave’s voluntary agreement for them to do so. This is wrong, in Rushdoony’s view.
If you consider the limited liability corporation of today, it has simply said that all its creditors are individually liable for any debts incurred in business over and above the assets of the corporation. This is done not with the consent of creditors but against their wishes, and imposes upon them conditions of business they would not accept voluntarily. It is true no one has to do business with a limited liability corporation. They can always close their business and live on the dole because there are not enough alternatives remaining in the marketplace for an honest man to do business.
Under the idea of contract law falls insurance of various kinds. It is true that insurance allows individuals to limit their liability which, in this case, is picked up by all the joint policy holders. Such arrangements are freely entered into and there is no compulsion to join—except in the case of auto insurance.
Should auto insurance be compulsory? Not necessarily, and it is under the laws of restitution that such a case can be made. Restitution requires full damages to be paid. He who caused the incident is the one who is liable to make full restitution. Compulsory insurance reintroduces coercion into the business arrangements. Insurance does shelter the individual from the full ramifications of his actions. But does that mean insurance should be compulsory? The retort to this question is, what happens when the individual does not have enough assets to make full restitution? Someone loses out, the victim. Insurance is a cheaper and more effective means to make sure the victim receives full restitution, although there is no guarantee that the courts will grant full restitution. It is hard to argue against compulsory insurance, and I’m not certain that’s the way to go. But it cannot be said that compulsory insurance is even close to the notion of limited liability laws when the idea of limited liability is to prevent those accountable in a situation from being held liable for the debts.
Insurance itself, however, is a form of self-restitution, according to Dr. Rushdoony.
The failure of a society to ground itself on restitution, or its departure from this principle, means a growing necessity for costly protection by means of insurance. Much insurance is, all too often, a form of self-restitution, in that the buyer pays for protection against irresponsible people who will not make restitution. The large insurance premiums paid by responsible persons and corporations are their self-protection against the failure of the law to require restitution.17
Thus, insurance, while being some attempt at self-protection, is also an indicator of the problem with limited liability.
Rushdoony identifies the history of this malady when he quotes a study by Stephen Shafer.
It was chiefly owing to the violent greed of feudal barons and mediaeval ecclesiastical powers that the rights of the injured party were gradually infringed upon, and finally, to a large extent, appropriated by these authorities, who exacted a double vengeance, indeed, upon the offender, by forfeiting his property to themselves instead of to his victim, and then punishing him by the dungeon, the torture, the stake or the gibbet. But the original victim of wrong was practically ignored.” After the Middle Ages, restitution, kept apart from punishment, seems to have been degraded. The victim became the Cinderella of the criminal law.18
In other words, Rushdoony sees limited liability in a broader historical context of rising statist power—socialism. “[T]he significant and neglected step towards socialism was limited liability.”19 For Rushdoony, socialism is unmitigated irresponsibility and a violation of free trade.
Free Trade Agreements
George Sweet makes a startling observation. When you buy a rail ticket that has printed on the back of it that the company will not guarantee that its services will run on time, nor will they accept responsibility for your luggage, you buy the ticket “under duress.” In other words, you have no choice but to accept the conditions because there is no other way to get to your destination. These conditions, however, are not contractual in nature; they are “duress.” Sweet applies this to the situation of limited liability: “So when a mercantile undertaking is started with a large capital and limited liability, those to whom it offers custom are under duress to deal with it, however much they dislike the limit of liability.”20 If you have trouble understanding duress, think coercion.
Sometimes it is necessary to ask: What checks are there to prevent fraudulent dealings in commerce? It is not necessary to have intention to defraud, to come under the umbrella of securities fraud today. All that is necessary is that you do not deliver what you promised to investors as an incentive for them to invest. Is there something that can be used as a check on those entrepreneurs who promise big but deliver small? Sweet answers the question for us. “The reckless debtor thus creates the reckless trader … The most natural, obvious and reasonable, though still inadequate check upon improvident venture, is the unlimited liability of the adventurers.”21
Limited Liability and the Church
The accusation has been made that Rushdoony did not study this subject well enough. If he had, it has been suggested, he would recognize that the church was one of the first corporations to come into existence. Thus Gary North concludes, “I disagree with R. J. Rushdoony’s condemnation of limited liability … What persuaded me that he was incorrect here was a careful consideration of the legal implications of the imposition of unlimited personal liability of church members for the decisions of pastors and church officers. Could the church function if every member were made potentially liable to the limits of his capital for the illegal activity of the church’s officers?”22
We’re back to the representation issue once again. Note that the argument here is not an exegetical argument. It is, rather, a pragmatic argument concerning the “legal implications” of full liability on church members. The church won’t be able to function if its members have full liability. This is a curious argument, because the very same argument could be used to justify limited liability in the public corporation, and Dr. North takes that step. North uses the example of a bank that lends to a church for its building, the church can’t meet the repayments, the bank should only be entitled to the building asset as a means of recovery. Then he suggests, “The same sorts of limited liability arrangements ought to be legally valid for other kinds of associations, including profit-seeking corporations, limited partnerships, or other private citizens who can get other economic actors to agree voluntarily to some sort of limited liability arrangement.”23
Notice his words carefully, “who can get economic actors to agree voluntarily to some sort of limited liability arrangement.” In other words, Dr. North is tying his idea of limited liability to contractual arrangements that are freely entered into by the respective parties. I do not believe Rushdoony would be against the idea of people limiting their debt obligations by contractual arrangements. That’s why I suggest it is limited liability laws that Rushdoony has in his sights.
Now George Sweet has already pointed out that limited liability laws were not necessary in order for people to make contractual arrangements among themselves. What limited liability laws do is add a new dimension to the nature of contracts: coercion. Dr. North writes about people who might voluntarily accept liability, but what he does not do is identify who should make the payments when there is no one volunteering to accept the debt obligations.
Could the church function if every member were made potentially liable to the limits of his capital for the illegal activity of the church’s officers? Yes. Someone is going to be liable for the debts. Who should that be if not the members? What the question suggests is that the functionality of the church is tied to the ability to avoid full accountability. But if that were true, then the whole notion of restitution falls in a heap. To be certain, accountability of the church officials will need to be monitored and controlled. But that’s the outcome of the idea that a person whose ox gores someone needs to manage the ox so that it does not do damage. Animals known to be a danger in the community render the owner with identified accountability for the action of his animals.24 So, too, people need to monitor the activities of their church leaders, as some recent activities of now former high profile church leaders have revealed. There really is a dark side to leadership, both in the church and the corporation.25
Limited liability, however, revolves around the question: Who should pay the bills? The simple answer is the person or persons contracting the debt. It’s a direct application of the restitution laws. Who should make restitution? The person or persons who caused the problem. It’s a direct application of the principle of “victim’s rights.” When a creditor is made responsible to cover his own losses, now the victim is penalized by having restricted rights while those who initiated the debt get off almost free. This is victim’s rights in reverse.
Dr. North’s disagreement does not overturn the logic of Dr. Rushdoony’s position. To do that, Dr. North would need to attack the link between the eighth commandment, the connection between profit and loss, as well as present a case that someone who does not agree with having liability foisted upon them has some moral obligation to pay up anyway. Dr. North would need to argue against the idea of free trade and freely agreed contractual conditions. I don’t think it’s his intention to do that.
By all means, let us have contracts that are freely entered into that limit one person’s liability that is then voluntarily accepted by another. But by no means can it be argued that the coercive nature of limited liability laws meets this standard.
Now there is nothing, under the general rules of commercial contract, that would prevent church elders from declaring that congregational members are going to be liable for the debts they create. But then they would be under obligation to tell prospective members of their decision, so that anyone who joins the church joins with full knowledge of what is going on. We’re back to the consent issue again, and the requirement for everyone to be fully informed of the conditions so that they act not under duress but as free agents.26 If the church elders can get a bank to lend the church money under the stated conditions of only having recourse to the physical assets of the church, they have met free trade contractual conditions and the members could not be pursued should something happen to the debt repayment.
Connected to this notion is the idea of representation and consent of the governed: Do my elders/leaders have my consent to create any kind of debt which I have some kind of moral obligation to be responsible for? In other words, does the role of leadership automatically give leaders an open checkbook to do what they like, knowing full well that they will not be held personally responsible and accountable for the outcome and that it can be passed on to those they lead?
Avoidance of the debt is not possible. Shareholders cannot easily blame their managers for the debts. “All the partners in a business are considered to authorize the managers, or active partners, to contract on their behalf all usual and reasonable engagements: and if they would bind a creditor by any restriction on this authority, or on any of its consequences, they must take care to obtain his assent to that restriction.”27
This issue is readily addressed in the modern corporation when it appoints a Chief Executive Officer. His employment contract will contain clauses that identify what he is authorized to do, and also identify limits to the authority that is being given to him. He will be granted authority to hire and fire people. He may also be given authority to contract debts, but that will not be an open checkbook. This authority may be tied to budgeting proposals which require debt. And the Board may approve the budget, and have a clause in the CEO’s contract that states he cannot spend more than 10 percent over budget without Board approval. For the CEO to do such a foolish thing would make him personally liable for the debts as a result of his violation of his employment agreement.
What you see is that none of the criticisms of Rushdoony actually address his arguments. Rather, some other propositions are presented as to why limited liability is acceptable. But unless you can demolish Rushdoony’s arguments, then they remain.
Behind some of the criticisms levelled against Rushdoony’s view of limited liability is a concern with the legal status of the corporation itself. Historically, European law identified the corporation as a legal “person,”28 whatever that might mean. For it is obvious that the corporation cannot act on its own behalf. It requires people to sign checks, authorize purchases and make sales, for example. The corporation does not fund itself into existence, and the accounts of the corporation will identify the amount of paid-up capital used to establish the business. It may be a nominal sum such as $10. Any other capital coming into the business then is either by way of equity capital placed in the business by the owners or loans to the business, either from shareholders or financial institutions. No one has ever seen a corporation jailed for committing offences, though they are often fined billions of dollars for their actions. Thus a distinction was made between artificial persons (i.e., corporations), and natural persons (i.e., people).
The history of the corporation as a “person” is a checkered one. It is beyond the scope of this essay to explore the advent of corporations and their identity as artificial persons. But author Thom Hartmann claims, “No laws were passed by Congress granting corporations the same treatment under the Constitution as living, breathing human beings, and none has been passed since then [1886—Santa Clara County vs. Southern Pacific Railroad].”29 But the growth of the corporations and their influence in our time would be difficult to achieve without limited liability and the identification of the corporation as a person. Contract law was already in place to allow people to allocate liability to a third party. The corporations, however, need limited liability to protect shareholders from full accountability for the actions of themselves or their agents. Australian author and psychologist Alex Carey could conclude, “The 20th century has been characterized by three developments of great political importance. The growth of democracy; the growth of corporate power; and the growth of corporate propaganda as a means of protecting corporate power against democracy.”30
There is nothing in the notion of the corporation as a “person” that weighs against Rushdoony’s presentation of the immorality of limited liability. If anything, it is merely a pragmatic argument that attempts to justify limited liability in order for the corporate managers and shareholders to escape the full consequences of their actions. It’s a poor argument.
It has been suggested that the corporation has a life of its own. “A corporation has a real mission, real assets and real responsibilities.” Not quite. A corporation cannot make a will concerning its assets or define its mission, whereas the owners of the corporation can direct the corporate managers to behave in a certain manner. The corporation’s mission is that established in its charter or articles of incorporation. The corporation cannot write its own charter; the initial shareholders do that, or the one granting the charter, such as the King of England.31 Similarly, while the corporation might possess real assets, it only holds these assets in trust on behalf of the shareholders. So, too, its responsibilities. The corporation is not responsible to itself; it is responsible to the shareholders or members. Corporations don’t do anything: people do things.
The status of not-for-profit corporations might seem an exception to this. But the non-profit organization merely retains the profits for future use itself, or gives them away to entities that are identified within its charter. Because the members elect not to receive profits does not absolve them from the obligations of the actions of their managers/agents who are generating revenue on their behalf.
Product Warranties and Guarantees
An argument proposed against Rushdoony’s view of liability runs something like this. When you buy something from a major corporation, it is the corporation that carries the guarantees and warranties and not the shareholders, it is alleged. But while the contract is with the corporation, there is no reason for the shareholders to be exempt from the warranties and guarantees that are made on their behalf in order to secure sales. We are here back to the issue George Sweet identified, that of the relationship between owners and their agents/managers. While the fiction is maintained that the corporation is a “person” and therefore shelters the managers and owners in some form, this is merely an artificial convention designed for the express purpose of stepping around liability.
This argument about warranties and guarantees is not an argument against Rushdoony’s position at all. It is yet another pragmatic argument that attempts to justify why liability should be transferred from one group of people to another. Without the legal protection of the legislatures it is certain that full liability would be in place. But legislative enactments do not create God’s law. They are either an expression of it or an example of disobedience to it. And the case against limited liability is not built from legislative acts but by a study of the Scriptures alone—sola scriptura. In other words, you cannot argue from the legislature back to the Bible and use legislative decisions as a tool to interpret the Bible. Rushdoony would never allow this as a valid hermeneutic, for good reason.
Who is liable for the promises of the corporation made by the managers? George Sweet would identify the profit motive as the way to determine who is liable. And as previously quoted, Sweet is adamant that individual traders or a corporation without liability is a travesty of commerce and justice.
Another criticism of Rushdoony’s view of limited liability involves the issue of group accountability. In the example cited, the question is asked, “Who would want to pool resources with other people in a company, if the debts of one of the partners may incriminate the company?” Since limited liability laws do not provide for the shareholders to be responsible for the debts of any of their co-members, this issue is a red herring. In a similar fashion, it is suggested that the clan should not be responsible for the debts of any of the clan members.
This, however, is not how limited liability laws work. There is no facility under limited liability laws for one member of a corporation to be able to pass his personal debts to the other members without their express approval. What limited liability does is allow all the members to avoid accountability for the full value of the debts of the corporation. As already indicated, contract law allows shareholders to make agreements among themselves by mutual consent. No shareholder has any automatic obligation for the personal debts of his fellow shareholders.32
How about when there is police misconduct in the community? Who should be liable for this if not the citizens of the community in which he is employed? In the American system, where the local sheriff is an elected official, the notion of representation is very clear. The police represent the citizen’s right to self-defense which they choose to do by electing and appointing local police officers. In a country such as Australia, the police are an arm of the state government, not local government, and they are appointed, not elected. There is no city police force, only a state police force. Does this mean the citizens of the state are ultimately responsible for the misconduct of their police? Not necessarily. Why not hold the officers fully accountable for their actions? That’s the Biblical model.
Every time we are confronted with an attempt to justify limited liability we are confronted with the question of who has the moral obligation to pay the bills. Limited liability does not eliminate obligation; it merely transfers it from some people to other people. And so we are left, on each occasion, with the task of identifying who is the legitimate holder of the obligation.
A word must be added about the broader concept of unlimited liability, which is the logical alternative to limited liability. Does Rushdoony believe in an unlimited liability universe? Yes, he does. “Man thus cannot escape an unlimited liability universe. The important question is this: in which area is he exposed to unlimited liability, to an unlimited liability to the curse because of his separation from God, or to an unlimited liability to blessing because of his faith in, union with, and obedience to Jesus Christ?33 So it is within this general context of liability that Rushdoony speaks against limited liability laws.
Rushdoony recognizes that the Sabbath year, however, wherein the lenderforgives debts owed to him, is a limitation on liability. The question needs to be asked, are limited liability laws merely an extension of this principle of the Sabbath year? I don’t think so. Rushdoony also recognizes there is an obligation to not withhold the wages of a hired man overnight (Lev. 19:13). These are non-credit terms for workers. When the question is asked, who are my workers?, the answer takes us from immediate employees on our payroll to those with whom we do business in general. If the principle of no credit is valid in the case of direct employees, it is also valid in the case of contractors that are engaged to supply goods and services. So the Sabbath year limitation on debt seems to have in mind the genuine poor who need to borrow, not those who are too lazy or irresponsible to pay as they go.34
When it comes to restitution where the penalty could be anything up to five times the value of an item, we see another example of God establishing the parameters for liability. Restitution can’t be ten-fold, but it can be up to five-fold. Limited liability laws, however, are not designed to bring justice to the marketplace; they are designed to transfer an obligation from one person to another without that person’s consent. This is what Rushdoony has in mind when he is critical of limited liability.
Limited liability diminishes property rights, depreciates restitution, severs the link between profit and loss, and encourages reckless decision-making because accountability is transferred to someone else who may not even know they have that liability foisted upon them. Businesses that buy on credit terms usually do so in order to use the unpaid bills as an interest-free loan to the business. It’s cheaper than bank finance.35
Sweet argues that profit and loss are linked. Principals who authorize their agents/managers to contract debts are liable for those debts. The principals in any enterprise are determined by who gets the profits, in other words, the shareholders. If a group of shareholders allow their managers to run up debts, the shareholders are responsible for those debts contracted on their behalf in the quest for profit. Shareholders could avoid being put in the situation by making sure their agents are not authorized to contract debts, or if they are, by placing tight contractual restrictions on how much can be borrowed. In which case, if the agents/managers did so without authorization, the shareholders might well insist the managers alone are responsible for the debts.
Someone is going to pay the debts. Who should pay is the leading question. Limited liability does not remove the debt—it merely transfers it from one person to another. As already indicated, personal directors’ guarantees are part of the commercial landscape in some places for those who want to buy on credit. So too is the legal requirement for all company directors to declare their company’s ability to pay all its debts during the forthcoming year when they fall due. Signing such a declaration, then trying to file for bankruptcy protection later in the year, makes it difficult for directors to hide behind limited liability laws, though it may protect the shareholders. The creditors, thus, are fighting back and limited liability laws are reduced in their effectiveness. This is a move in the right direction. These steps do not necessarily give creditors access to the assets of shareholders in a company. But they do help to hold directors personally accountable for the actions they take.
Rushdoony’s view, however, is not built on pragmatic considerations. His conclusions derive from the way he views the law of God, including property rights, and most importantly, restitution. Rushdoony is also in favor of no debt as a general rule and hard money. Limited liability allows some people in the community to pass off their responsibilities and walk away from their obligations. Dr. Rushdoony would never agree to this, and it will be a tough challenge, which so far no one has met, to argue that the Bible says otherwise.
If Rushdoony is wrong on this one issue, limited liability, then he is wrong in other major aspects of his theology, e.g., restitution. If he’s wrong on restitution, he’s wrong on something else, for Rushdoony’s theology is a seamless web—systematic theology. All the components are connected.
There are some people in the Christian Reconstruction movement who are critical of Rushdoony on this point of limited liability. They are, however, like a car salesman who tells his prospective customers, “This is a great car but it has some major defects.” Would you buy that car from the salesman who, in many respects, is merely trying to be honest with his evaluation of the vehicle? It was suggested by one person that Rushdoony did not study the subject well enough. What is obvious is that his critics have not studied Rushdoony well enough to understand his antagonism to limited liability laws.
Limited liability laws are unnecessary because there is nothing that prevents buyers from negotiating with sellers and getting the sellers to agree to accept the terms voluntarily. It is because hardly any sellers in their right mind would sign such an agreement that limited liability laws were established to make compulsory what could not be achieved by contract law and free trade.
No, I am not saying Rushdoony cannot be critiqued at times. But on the point of limited liability he is on the high moral ground of maintaining that the one who incurs the debt has the obligation to pay it.
1. R. J. Rushdoony, Politics of Guilt and Pity (Vallecito, CA: Ross House Books, 1995).
2. R. J. Rushdoony, The Institutes of Biblical Law (Nutley, NJ: Craig Press, 1973).
3. Politics, p. 258.
4. Politics, p. 260.
5. Institutes, Ch. 4 “The Fourth Commandment,” Section 2: The Sabbath and Life. In my book, Making Sense of Your Dollars: A Biblical View of Wealth (Vallecito, CA: Ross House Books, 1995), I present eight arguments against debt.
6. Politics, p. 259, p. 260.
7. Politics, p. 262, emphasis added.
8. Institutes, p. 664.
9. Institutes, p. 276.
10. London: C. Roworth and Sons. Available as a free download from Google Books.
11. Sweet, p. 7.
13. Sweet, p.8.
14. Sweet, p. 10.
15. A.A. Hodge, Evangelical Theology: Lectures on Doctrine (Carlisle, PA: Banner of Truth Trust  1990), pp. 246–247.
16. Institutes p. 274.
17. Institutes p. 277.
18. Institutes, pp. 274–275.
19. Politics, p. 262.
20. Sweet, pp. 14–15.
21. Sweet, p. 15.
22. Gary North, Authority and Dominion Vol. 3 (Dallas, GA: Point Five Press, 2012), p. 735.
24. Rushdoony, Institutes, Chapter IV: “The Sixth Commandment,” Section 8: Restitution or Restoration.
25. See Gary L. McIntosh and Samuel D. Rima, Overcoming the Dark Side of Leadership (Grand Rapids, MI: Baker Books, Revised ed. 2007).
26. The church problem is exacerbated when you consider some circumstances. 75 percent of the congregation vote to borrow money, then there’s a church split and 50 percent of those who voted for the debt leave. Are they still under obligation to contribute to the loan repayments for a loan they authorized?
27. Sweet, p. 9.
28. William Blackstone, Commentaries on the Laws of England, Book. 1, Ch. 18.
29. Thom Hartmann,Unequal Protection: How Corporations Became “People”—and How You Can Fight Back (Berrett-Koehler Publishers. Kindle Edition, 2010), Kindle Locations 372-379.
30. Quoted in Hartmann, ibid., Kindle Locations 310-312. See also, David C. Korten, When Corporations Rule the World (Berrett-Koehler Publishers, 3rd edition, 2015).
31. See Blackstone Commentaries for more detail on this.
32. In a case in Ohio, a friend of this author co-purchased a building, buying a 15 percent share in the property. The building was purchased with a loan from a financial institution. When the majority partner failed to make the payments on the loan, foreclosure became a reality. The financial institution correctly limited the proportion of the debt of the minority partner. He was not required to cover the debts of the major partner, but he did have to cover 15 percent of the agreed value of the property.
33. Rushdoony, Institutes, p. 669.
34. The internet, however, has changed the way many people do business. It is always payment at the time of purchase. No credit terms are offered, or necessary. This has created the opportunity for the credit card companies to provide credit to buyers. The selling merchant gets paid immediately, but the buyer still has a debt, now owed to the credit card company.
35. Some of the worst examples I have witnessed of this is manufacturing plants in New Jersey that use employment agencies for their labor force, but they insist on up to six months credit terms before they pay the bill. The employment agency then has to borrow the cash to pay the workers each week. This arrangement usually drives the employment agency out of business, for the manufacturers avoid as much as possible paying the higher prices to cover the interest costs.
- Ian Hodge
Ian Hodge, Ph.D. (1947–2016) was a long-term supporter of Chalcedon and an occasional contributor to Faith for All of Life. He was also a business consultant in Australia, USA, Canada, and New Zealand, and a prominent piano teacher in Australia.