RE: Thought Experiment: Coinbase Goes Bankrupt

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What you're talking about is the corporate veil. It's a legal concept that separates the shareholder from a corporation or the member from the LLC as far as liability goes.

With an LLC, you as a member (owner or part owner) can take a distribution. Pretty much anything goes as long as there's still enough left over for the company to operate and fulfill its obligations. Obviously this is ill defined, but it's really there just to stop you from doing something like taking out a loan on a new LLC, taking all of cash from the loan as a distribution, and then declaring the entity insolvent with no attempt to repay. If you pull some kind of fraud like that, this will pierce the corporate veil and creditors can then seek your personal assets as compensation (other procedural violations can cause this piercing as well). That said, if you dot your i's and cross your t's, there's nothing they can do in a bankruptcy but try to extract what the entity is liable for from the business' inventory and non-inventory assets.

Corporations work slightly differently. Unlike an LLC were the member can't take a salary, shareholders can be salaried employees of the entity and legally collect money from the company that way. They can also collect dividends. Other than those things and selling shares, I don't believe there's any other way to take money out of a corporation as a shareholder. Violate those rules, the veil is pierced, and they can legally go after your personal assets.



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But it still leaves a trail for seizing assets acquired from the proceeds. I think it would not be covered by criminal law but certainly civil law would have that as a protection. Hence why regulations and laws exists.

Violate those rules, the veil is pierced, and they can legally go after your personal assets.

This supports what I had stated above.

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Oh yeah, for sure. I was more confirming and clarifying what you said than challenging it. I've gone through this process of starting an LLC myself within the last few years, so it's fresh in my mind. Even as I take advantage of it, I realize how F'd up it is that people can be completely insulated from legal and financial liability this way. It's really up to the individual as to whether they'll game the system to screw people over or act with integrity. Also yes, criminal law makes no distinction, but in practice it can insulate people from liability. We've seen situations in the last decade or so where entities have been held criminally liable and not a single officer, board member or shareholder was held directly accountable. They just levied a huge fine against the company and they just went on about their business. IIRC one of the big investment banks went through this. Nobody went to jail.

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