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How is that possible/legal? Is that some kind of structure that wealthy people have access to but regular people don’t? It sounds like you’re describing a way

How is that possible/legal? Is that some kind of structure that wealthy people have access to but regular people don’t? It sounds like you’re describing a way to externalize your losses to the bank or to the public, which is indeed the best way to make money fast, but is parasitic on society as a whole.

fighterpilot 5y ago
It is both possible and legal for anyone in an agency relationship, be it an executive at a company or a hedge fund manager. Executive - take a massive unjustified risk (in terms of company direction), if it works out, get a huge bonus, if it doesn't work, get fired (by the board) Hedge fund manager - take a massive unjustified risk (in terms of a trade), if it works out, get a huge bonus, if it doesn't work, get fired (by your clients) These are both long call options with the premium equal to the opportunity cost of missed salary and the reputational impact. Individuals can't do it because they're not an agent for another group or another individual.
friesfreeze 5y ago
Limited liability entities (e.g. corporations, LLCs, etc) are one of the legal cornerstones our economy. Anyone can form one, but it takes expert (thus expensive) advice from a lawyer to make sure you are in compliance and thus really protected - either as a shareholder or an agent of the company. This makes sense when a lot of money is at stake. To be clear: the entity is liable for the debts it incurs but not necessarily its shareholders or agents. If it cannot pay its debts it goes into bankruptcy and is either reorganized with its creditors as its new owners or liquidated and sold.
fennecfoxen 5y ago
This is something anyone has access to. The price of registering and maintaining some sort of corporation (LLC, etc) is in the $100-$400/yr range depending on state. Most people obviously don't find it's worth the hassle, obviously, and it comes with additional troubles like paperwork and taxes, but the barrier is not all that steep. The limited-liability corporation structure moreover has some majorly useful properties for society. For instance, you probably own some shares of a major pharmaceutical company in your portfolio (through a retirement fund). If the company loses a lawsuit related to, say, the opioid epidemic, and owes billions, and goes totally bankrupt, then you can 100% lose your stake in the company as it is turned over to creditors — but those creditors cannot go after you personally as an owner of the corporation for every dollar that you own; your liability is limited. This has democratized investing a lot, and individual investors benefit quite a bit, as they have lesser risk tolerance than the billionaires. However, the limitation of liability is a reason prudent lenders ought consider the risks inherent in lending to you. For instance, if you bring an adequate down payment, and you are using the proceeds to purchase an asset that has some reasonable value — the worst case is they're stuck with a building still worth something, plus the down payment. The problem, again, is when taxpayers end up becoming imprudent lenders because of policy or bailouts.
- twic 5y ago
  Creating a limited company purely to Dockerise your own wild trades might not work, though - that might be a piercable veil: https://en.wikipedia.org/wiki/Piercing_the_corporate_veil#United_States https://en.wikipedia.org/wiki/Piercing_the_corporate_veil#Un...
  - fennecfoxen 5y ago
    Yeah, the "holding corp with a business plan to buy a building with a down payment and a mortgage — renovating it, collecting rent and deprecation, and later selling, hopefully for a profit" is a pretty normal thing, and describing a huge portion of commercial real estate (n.b. this means real estate owned for profit, not in the SimCity zoning sense). A failure leaves the lender owning the building. This is expected. A single owner running insanely levered stock trades, though, could easily be found grossly undercapitalized, and that's another matter entirely.
- fallingfrog 5y ago
  I thought there was some kind of separation between ownership and management in an llc? Like, the company is its own entity, it makes its own decisions, and it can borrow money by itself. And then the individual shareholders are not liable for the company’s debts. But you’re saying that the sole shareholder can also be the management? I guess in that case it’s really up to the bank or brokerage to have enough sense to not lend your llc money if the business plan is to fly to Vegas and put it all on red..
  - nradov 5y ago
    Yes which is exactly why banks and brokerages don't lend to LLCs without significant collateral and/or co-signers.
  - fennecfoxen 5y ago
    > But you’re saying that the sole shareholder can also be the management? Yeah, there are plenty of single-owner LLCs. It's the go-to small-company structure.

fighterpilot 5y ago

It is both possible and legal for anyone in an agency relationship, be it an executive at a company or a hedge fund manager. Executive - take a massive unjustified risk (in terms of company direction), if it works out, get a huge bonus, if it doesn't work, get fired (by the board) Hedge fund manager - take a massive unjustified risk (in terms of a trade), if it works out, get a huge bonus, if it doesn't work, get fired (by your clients) These are both long call options with the premium equal to the opportunity cost of missed salary and the reputational impact. Individuals can't do it because they're not an agent for another group or another individual.

friesfreeze 5y ago

Limited liability entities (e.g. corporations, LLCs, etc) are one of the legal cornerstones our economy. Anyone can form one, but it takes expert (thus expensive) advice from a lawyer to make sure you are in compliance and thus really protected - either as a shareholder or an agent of the company. This makes sense when a lot of money is at stake. To be clear: the entity is liable for the debts it incurs but not necessarily its shareholders or agents. If it cannot pay its debts it goes into bankruptcy and is either reorganized with its creditors as its new owners or liquidated and sold.

fennecfoxen 5y ago

This is something anyone has access to. The price of registering and maintaining some sort of corporation (LLC, etc) is in the $100-$400/yr range depending on state. Most people obviously don't find it's worth the hassle, obviously, and it comes with additional troubles like paperwork and taxes, but the barrier is not all that steep. The limited-liability corporation structure moreover has some majorly useful properties for society. For instance, you probably own some shares of a major pharmaceutical company in your portfolio (through a retirement fund). If the company loses a lawsuit related to, say, the opioid epidemic, and owes billions, and goes totally bankrupt, then you can 100% lose your stake in the company as it is turned over to creditors — but those creditors cannot go after you personally as an owner of the corporation for every dollar that you own; your liability is limited. This has democratized investing a lot, and individual investors benefit quite a bit, as they have lesser risk tolerance than the billionaires. However, the limitation of liability is a reason prudent lenders ought consider the risks inherent in lending to you. For instance, if you bring an adequate down payment, and you are using the proceeds to purchase an asset that has some reasonable value — the worst case is they're stuck with a building still worth something, plus the down payment. The problem, again, is when taxpayers end up becoming imprudent lenders because of policy or bailouts.

twic 5y ago
Creating a limited company purely to Dockerise your own wild trades might not work, though - that might be a piercable veil: https://en.wikipedia.org/wiki/Piercing_the_corporate_veil#United_States https://en.wikipedia.org/wiki/Piercing_the_corporate_veil#Un...
- fennecfoxen 5y ago
  Yeah, the "holding corp with a business plan to buy a building with a down payment and a mortgage — renovating it, collecting rent and deprecation, and later selling, hopefully for a profit" is a pretty normal thing, and describing a huge portion of commercial real estate (n.b. this means real estate owned for profit, not in the SimCity zoning sense). A failure leaves the lender owning the building. This is expected. A single owner running insanely levered stock trades, though, could easily be found grossly undercapitalized, and that's another matter entirely.
fallingfrog 5y ago
I thought there was some kind of separation between ownership and management in an llc? Like, the company is its own entity, it makes its own decisions, and it can borrow money by itself. And then the individual shareholders are not liable for the company’s debts. But you’re saying that the sole shareholder can also be the management? I guess in that case it’s really up to the bank or brokerage to have enough sense to not lend your llc money if the business plan is to fly to Vegas and put it all on red..
- nradov 5y ago
  Yes which is exactly why banks and brokerages don't lend to LLCs without significant collateral and/or co-signers.
- fennecfoxen 5y ago
  > But you’re saying that the sole shareholder can also be the management? Yeah, there are plenty of single-owner LLCs. It's the go-to small-company structure.