Limited liability is not a free lunch. Being able to be sued is an important right—it gives others the confidence to deal with you, as you can be held accountable. Being able to discharge those obligations in bankruptcy means a LLC has to prove its reliability in other ways—for example, by holding more capital, or posting collateral, or simply offering better prices to make up for it. As it happened, this proved to be more efficient that unlimited personal liability, so LLC’s won out. Third parties could freely choose to deal with non-LLCs if they wanted to, and if they did, they would not be taxed to fund LLCs, so there is no subsidy.
The one case where you have a stronger case is with negative externalities, where an LLC might cause damage to third parties. In this case third parties are paying the ‘tax’ of the externality. However, I do not think this was the most important cause for the rise of the LLC, and there are many other checks and balances—for example, not just any LLC is allowed to own a nuclear power plant, you have to be very well capitalized.
Also LLC’s are generally more heavily taxed than partnerships, etc. - they pay income tax at the corporate level as well as at the individual level. They have risen to prominence despite this (literal) tax.
Limited liability is not a free lunch. Being able to be sued is an important right—it gives others the confidence to deal with you, as you can be held accountable. Being able to discharge those obligations in bankruptcy means a LLC has to prove its reliability in other ways—for example, by holding more capital, or posting collateral, or simply offering better prices to make up for it. As it happened, this proved to be more efficient that unlimited personal liability, so LLC’s won out. Third parties could freely choose to deal with non-LLCs if they wanted to, and if they did, they would not be taxed to fund LLCs, so there is no subsidy.
The one case where you have a stronger case is with negative externalities, where an LLC might cause damage to third parties. In this case third parties are paying the ‘tax’ of the externality. However, I do not think this was the most important cause for the rise of the LLC, and there are many other checks and balances—for example, not just any LLC is allowed to own a nuclear power plant, you have to be very well capitalized.
Also LLC’s are generally more heavily taxed than partnerships, etc. - they pay income tax at the corporate level as well as at the individual level. They have risen to prominence despite this (literal) tax.