The Concept of Separate Legal Entity in light of Corporations

Bhanu Srivastava

RMLNLU, Lucknow

Editor’s Note: The paper deals with the concept of the separate legal identity of a Corporation; which is separate from its shareholders or its directors. The concept is looked at form the point of view of the origin of the separate identity of a Corporation and the need for such a distinction along with the capacity and liability of a Corporation. The various theories of Legal Personality are also discussed in great detail.”

INTRODUCTION

The main object of Law is to regulate the relationship between individuals in the society. The validity of the acts and omissions of persons is determined on the basis of their reasonableness. All those acts which do not adversely affect the interest of others are held to be lawful whereas the acts which interfere with the rights of others are called unlawful. Therefore law enforces certain duties on individuals for the protection of interest of mankind. Therefore rights and duties form the basis of judging the legality of mans act. The law imposes liability for unreasonable and unlawful acts, the enforcement of which is ensured through legal sanctions. The law being concerned with regulating the human conduct the concept of legal sanctions. The law being concerned with regulating the human conduct, the concept of legal personality constitutes an important subject matter of jurisprudence because there cannot be rights and duties without a person.

The separate legal entity concept, as it applied to large joint stock companies, evolved throughout much of the nineteenth century, and in particular, during the period between 1840 and 1880. This evolution was gradual and involved subtle changes that occurred on a number of fronts. Common law developments included the changing nature of shares and the refinement of the internal relationships within a company which served to separate a company from its shareholders and thereby differentiated companies from partnerships. At the same time, companies adapted their capital structures and the ways in which they raised capital so as to make themselves more attractive to investors. These practices also reflected the distinction drawn by the investment sector between joint stock enterprises and partnerships. The separate legal entity concept then, was largely developed by the late nineteenth century insofar as it applied to joint stock companies.

 This project work along with different theories of corporations also examines the well-known case of Salomon v Salomon & Co Ltd and its effect on the evolution of the separate legal entity concept. It is important to consider the role of Salomon’s case in this evolutionary process because the legal principle derived from the case has been the legal basis of the subsequent application of the separate legal entity concept to corporate groups. Salomon’s case is usually regarded as a landmark case which finally established the fundamental principle that a company is a separate legal entity distinct from its members. This core principle of company law has come to be so closely associated with the case that it is widely known as ‗the principle in Salomon’s case‘. According to this widely accepted narrative, Salomon’s case represented a belated but inevitable advance of the law towards clarifying the separate nature of the relationship of shareholders and their company and thereby better serving the needs of business by establishing a more efficient company law that recognised the commercial expectations of the business community.[1]

ORIGINS

The word “person” is derived from the latin word persona which meant a mask worn by actors playing different roles in a drama. Until sixth century the word was used to denote the part played by a man in life. Thereafter it began to be used in the sense of a living capable of having rights and duties.

Generally there are two types of person which the law recognises namely natural and artificial. The former refers to human beings while latter to other human beings which law recognised as having duties and rights. One of the most recognised artificial person is a corporation.  In the opinion of many writers the word”  personality” has been restricted to human beings because of the sole reason that they only are subjected to rights and obligations, but in law the scope of word “personality” is wide enough to cover gods, angels, idols, corporation etc. despite of the fact that they are not human beings.

Conversely there may be living persons such as slaves who were not treated as person in law because they were not capable of having rights and duties. Likewise, in Hindu ascetic who has renounced the world ceases to have any proprietary rights and his entire estate is passed on to his heirs and successors and his legal personality is completely lost.

Human beings are no doubt units of society and were in existence prior to evolution of both law and society. Since laws were made by individuals and for them, jural relations between them came to be recognised for legal purposes. Human beings as a legal person, therefore implies a multitude of claims, duties liberties, liabilities etc.

However no sooner than later it was realised that treating only human beings as persons  in law would lead to good deal of needless perplexity, which could be avoided by conferring legal personality on certain jural relations applicable to others  than human beings for the purposes of law.  

Definition of legal person:-

Jurists have defined legal persons in different ways,

The German jurist Zitelmana considers “will” as the essence of the legal personality to quote him “personality is the legal capacity of will, the bodylines of men for their personality a wholly irrelevant attribute”

Salmond defines a person as “any being to whom the law regards as capable of rights and duties. Any being that is so capable is a person whether human being or not and nothing that is not so capable is a person even though he be a man”[2]

Gray defines “person” as entity to which rights and duties may be attributed” any being that is capable of holding a right or duty, whether it being a human or not is person in law.[3]

According to Paton, legal personality is a medium through which some such units are created in whom right can be vested.[4]

Therefore persons in juristic terms are of two kinds: natural and legal .the former are human beings while the latter may be real or imaginary, in whom law vests rights and imposes duties and thus attributes personality by way of fiction.

A natural person is a living human being. But all human beings need not necessarily be recognised as persons in law. For example slavery, before abolition of slavery the slaves were considered to be devoid of any legal personality for they could not have any rights and duties. Also persons such as children have restricted rights for they do not have right to vote.

Legal persons on the other hand is a person any subject –matter in which the law attributes legal personality. Legal personality being the creation of law can be conferred on entities other than human beings. As Salmond rightly observed that “law in creating legal persons always does so by personifying some real   things”. He further pointed out that all though all legal personality involves personification the converse is not always true.[5]

Legal persons are therefore artificial beings to which law attributes personality by way of fiction where it does not exist in fact. They are capable of rights and duties like natural persons.

 Hibbert classified legal persons into three different categories:

  • Certain non-living things can be conferred legal personality by personification. The existence of such a legal person is real but its personification is fictitious.
  • A collection of rights and duties may be vested in some real or imaginary beings to whom personality is attributed by law.
  • Fitzgerald, the learned editor of Salmond  jurisprudence writes that legal persons being the arbitrary creations of the law, may be of several kinds the English law however recognises only a few kinds of legal persons .(1) corporations (2) institutions such as trade unions and societies and associations, and (3) the estate of funds.

THE CONCEPT OF SEPARATE LEGAL ENTITY

The principal effects of the formation of a company are twofold. First, its shareholders, and their transferees, become members of an association and are granted rights as such. Pre-eminent among these are, usually, powers of control in the widest sense of an entitlement to participate, by voting, in the management of the company through the appointment and removal of its directors, the distribution of profits and other decisions of the company in general meeting, and also by the power to enforce the company’s regulation. Secondly, and consequently, the members relinquish all proprietary and other interests in the monetary or other consideration which they have given for their shares and which becomes wholly vested in the company. In effect, therefore, the members’ rights of ownership of their assets are completely reconstituted and the powers conferred by membership substituted for powers of direct this result is achieved by.

 Applying to the company three basic principles or groups of principles. First, the legal capacity of the company is restricted or limited in its extent, both by the objects of the company and, more basically, by the common law, to activities which are both lawful and appropriate to the general scope of its purposes. Secondly, within the scope of its particular objects the company is accorded legal capacity for proprietary, contractual and other purposes which is of exactly the same nature as that possessed by natural persons of full capacity. This capacity is entirely separate from, and not derived from or related in any way to, the individuals who ultimately comprise the company’s membership. Thirdly, the company itself is accorded full and independent procedural capacity both vis-h-vis its members and outsiders. From the combination of these principles flow all the well-known practical aspects of separate legal entity. For example, due to its separate proprietary and other capacity the company may enjoy perpetual existence, its usefulness as an entity for accounting purposes is given a legal foundation, and the possibility is opened that its members may limit their liability.

Like the trust, the company enables the proprietary interests of natural persons to be associated and reconstituted in a manner which makes possible a real division of the ownership and control of property. Unlike the trust, however, the company may, to the extent it is empowered, itself possess full and independent capacity to exercise contractual, proprietary and other rights.

Corporate personality:

Meaning

Corporate personality is a creation of law. Legal personality of law is recognised both in English and Indian law. A corporation is an artificial person enjoying in law capacity to have rights and duties and holding property. A corporation is distinguished by reference to different kinds of things which the law selects for personification. The individuals forming the corpus of the Corporations are of two kinds distinguished in English law as corporations aggregate and corporations sole. According to coke persons are of two sorts ( a)persons naturally created by god and persons incorporate or politique by policy of man. A corporate aggregate is a group of co-existing persons and a corporation sole is an incorporated series of successive persons. The former is that which has several members at a time and the latter is that which has one member at a time. Corporations are found only when the successive holders of some public office are incorporated so as to constitute a single, permanent, and legal persons.[6]

Evolution of the notion of corporate personality

In mature systems of law the doctrine of corporate personality is fully developed and a clear –cut distinction is made between the individual who compose a corporation and the corporation itself. If we postulate that the company may have a distinct persona separate from that of is shareholders or directors, it is difficult to attack the logic of this distinction. Whatever may be said of its practical effect? Conversely the acts of two separate departments of a company are in law the act of the same person.[7]

If a group of miners wish to co-operate to secure cheap delivery of coal from the colliery at which they work, they must be careful as to the legal forms they use. if they create an incorporated company to organise the transport a carriers licence must be secured, since the company is carrying goods for hire or reward .but if they merely form an association then each member is regarded as the part owner of the vehicles and the co-owners do not carry their own goods for hire or reward merely because they contribute to the running expenses. The formation of a company introduces a new legal persona which owns vehicles and receives money for coal that does not belong to it[8]

In modern law therefore there is a clear cut distinction between the personality of a company and the personality of its members. The company may engage in juristic acts, sue, and be sued .though all the members change overnight, indeed even if they all die the company remains the same legal persona. But this conception of corporate personality is achieved but slowly.[9]

The first step to evolve is based on family, but no doctrine of group personality is necessary at home the family retained a very strong organisation but no theoretical difficulty arose as its powers were vested in human pater families. Religious and ecclesistical grouping provides another unifying element and we also have the manifold agencies of government such as government such as the counties, hundreds and boroughs of English law. Economic associations such as the merchant guilds create another organisation of the community. But it is futile to expect to find answers to problems phrased in modern language concerning corporate personality, for they were not asked earlier by the lawyers. We have already seen that the state in England reached a high degree of organisation on the very inadequate theory that the state was the king and the king the corporation sole.[10]Duff’s analysis on rule of Roman law reveals how long the road to a fully developed conception of human personality is. Persona was not always used in the sense of legal personality, and there are hundreds of passages where homo could be substituted for persona without any apparent change in the sense. If we find lack of analysis where the individual is concerned it is not surprising to say that “the republican lawyers did not get beyond the first rudiments of that very abstract and artificial conception, corporate personality”.

In the English law there were in thirteenth and fourteenth centuries numerous active groups of whom some were dissolved into their component parts before they became corporations others followed a gradual development to legal personality. When Bracton wrote the notion of corporate personality .it not clearly understood and the evolution was comparatively slow. The inimitable touch of Maitland has enlivened the story of the corporation sole and we see there the great difficulty that exist in securing a clear distinction between the rights of natural man and the rights of corporation sole which it represents. The corporation sole was a useful device for holding of title to church land, but, although logic would require us to recognise that the artificial corporation sole can survive the death of natural person, the medieval lawyers however thought that the artificial corporation was in abeyance if the benefice was as vacant. A statute of limitation speaks of a corporation sole or his predecessor.[11]

Later in the fifteenth century it was felt that the corporation could not sue one of its members, for this was really a case of a man suing himself. By the time coke, it was laid down that the corporation could be created either by a common law, by authority of parliament, by royal charter or by prescription –but there must be some lawful authority of incorporation there must be. Corporation played a large part in development of British empire .as a result of which there were 65000 registered companies in England, but within forty years the number increased to 3, 31,000.

In 1897 Salomon v Salomon & Co Ltd[12], a case concerning the legitimacy of limited liability of a single beneficially owned company according to the companies legislation, created  the concept of the separate legal personality of a company. This idea, often described as a fundamental principle of

Company Law by our judges, exists both as a powerful metaphor and a judicial reality The interaction of these two aspects has in a sense caused the concept to assume a life of its own as a persuasive metaphor which has dictated the course of law focussed around its fulfilment rather than the specific regulative aims of the law in each discrete area. The principle’s application in so many different situations each with utterly different consequences, indicate a sense in which the courts have often merely mapped out the logical consequences of ‘separate legal personality’ with inadequate examinations as to its specific ramifications.

The concept of the corporation as a separate legal personality is, as Farrar describes “essentially a metaphorical use of language, clothing the formal group with a single separate legal entity by analogy with a natural person’] while obviously a fiction, the choice of metaphor or analogy is not entirely arbitrary, and must respond to organisational realities of the corporation as well as conforming with and making intelligible the treatment of organisations as legal actors[13] In this sense the conception of a corporation is both analytical and ideological, descriptive and prescriptive, It is not enough to dismiss the debate over the nature of corporate personality as Dewey did in 1920 by emphasising that corporate rights and Liabilities were the product of the law and that the legal implications or meanings of the corporation was “whatever the law makes it mean”.[14]

The law’s conception that the “company is at law a different person”[15] in some ways seems proper and satisfying, as Dan-Cohen writes, °it at once provides a unifying familiar image of The organisation and expresses those features in virtue of which treating the organisation as a legal actor makes sense .[16]The corporation as a complex organisation requiring regulation in many different situations presents a special problem as Dan Cohen writes:

“The cognitive need for ’epistemic access’ thorough a Unifying metaphor is felt most urgently with respect to organisations because of their ’ontological elusiveness’: hovering between the abstract and the concrete, they evade our grasp by constantly invoking the opposing fears of reductionism and Rectification.”

The metaphor of personality is useful in conceptually facilitating and describing many of the corporation’s traditional and modem corporate attributes. The metaphor was used in Salomon to express the fact that Salomon’s incorporation was legitimate according to legislation and therefore he should be a11owed to benefit from limited liability. The creation of the separate legal person analogy/metaphor was useful in particular to assert this point against the first instance judge mad court of appeal who held respectively that the company was Salomon’s agent and that Salomon was trustee for the company.[17] The language used however, does not add anything to our understanding of the real issues involved and in particular, the analogy with, or metaphor of, person creates some problems which exhibit the typical dangers of metaphorical thinking as Dan-Cohen write:

“By inducing misplaced analogies between individuals and organisations, the metaphor of person easily leads to anthropomorphism: the attribution to organisations of traits and the adoption toward them of attitudes that properly pertain to individuals only. The conception of the company as a person in particular has contributed towards two tendencies: firstly the tendency to treat the normative status of Corporations with similar considerations that ground and determine the legal fights of individual human beings, and secondly, the diversion of judicial attention from the distinctive features of organisations (many of which obviously do not correspond to the idea of ’person’) and from the normative implications of these features”[18].

The courts’ treatment of separate legal personality

The doctrine of “piercing the veil” has been the primary method through which the courts have mitigated the strenuous demands of the logical fulfilment of the separate legal personality concept. The problems with finding some thread of principle through all the decisions basically stem from the false unity of the cases which, while involving vastly different underlying issues, are still linked under the metaphor of the ’veil’ As Blumberg writes ~the conceptual standards of entity law are frequently regarded as universal principles and applied indiscriminately across the entire range of the law o In that way while it is possible, as some writers have done, to analytically organise the cases in this area in various ways, what is needed is a more diagnostic approach which examines why rather than how the area is a problem o The point is not to simply rationalise the disparate cases under some principle, but to point to their essential dissimilarity and criticise the framework around which they are organised. The function of much of the courts’ work in this area is to delineate the legitimate uses of the corporate form° It is obvious that the existing framework, organised as it is around reluctant departure from the demands of a metaphor, is inadequate for the proper articulation of such varied and complex questions.

The primary weakness of most attempt to rational the cases in the area is their tacit acceptance and reliance on the veil metaphor. A more obvious example of this can be seen in an article by Otto lenghi whose self-appointed task is to propose suggestions for some inroads into this jungle of judgments.

Ottolenghi commences his analysis –“the the popular warning of Cardozo J that ’metaphors in law are to be narrowly watched, for starting as devices to liberate thought they end often by enslaving. . However, his analysis is divided and organised around four categories: ’peeping behind the veil’, ’penetrating the veil’, ’extending the veil’, and ’ignoring the veil of each of these categories he argues ’has its own appropriate set of considerations and justifications.

 Such an approach is flawed in its reliance for a legal principled analysis on the concept of the ’veil’. While obviously compromised by the fact that it is ’result-driven’ its assertion that there are considerations appropriate to categories referable to the ’veil’ allies itself to perpetuating the very source of confusion in this area. Any framework that would align Lee v Lee’s Air Farming Ltd[19] (a case about whether the director of a single member family business could legally be allowed to employ myself for the purposes of workers compensation) and Walker v Wimborne[20] (a case on directors’ duties within corporate groups) on the basis of their similar treatment of the corporate veil can only blur any understanding of the area.

The ’categories analysis’ adopted by most writers identifying particular legal categories which have been used to justify piercing the corporate veil has similarly been criticised for being result oriented’ and ’rarely assisting as a guide to predicting when and under what conditions another court will be prepared to lift the veil.

Corporations: Legal Capacity

To the extent that a company is properly authorised to act, what is the nature of the legal capacity which it may exercise? Is it real,” or ‘‘fictitious”? The terms “fictitious” and ‘‘artificial,” as sometimes used to describe companies can only be understood by taking account of the twofold nature of the corporation. It consists both of an association of members, which may  themselves be corporate bodies; and of an entity possessing independently of its membership the legal capacity to exercise proprietary, contractual and other powers. Clearly, as an association of members it has as real an existence as any other formally constituted society, and the above terms must therefore refer primarily to the nature of its legal rights and obligations. It may be thought, for example, that when a company ‘‘ owns or deals in property, or enters into service, sale or other contracts, it does so not in its own right, as a natural person may do, but merely for or on behalf of its members and for their benefit. This being so, the company in reality exists simply as the agent of its members, or as a trustee for them, of property and contractual rights and obligations which in a true sense, taking into account (‘the realities of the situation,” belong to those members.

It follows that on appropriate occasions the courts may or ought to disregard the fiction and deal instead with the company in its true nature as the agent or trustee of its members. To deny this proposition is not to assert that a company can never be the agent or trustee of its members or directors. It can, of course, act as an agent or as a trustee for any other person or persons, including its own members and directors. Whether or not it is acting in such capacity does not depend on the existence of an independent mind to control the company, as was shown in Lee v. Lee’s Air Farming Ltd.,“ but on whether the proprietary, contractual or other rights in question are, as a question of fact, being exercised on behalf of its members.

While this is undoubted, it does not affect the wider proposition that, irrespective of true legal agency, a company may always be held to be the agent or trustee of its members in appropriate circumstances. In oth3er words, in reality, or in substance, all the pro- proprietary, contractual or other rights which may be in the apparent or ‘(fictitious” ownership or possession of a company are in fact held or exercised by it on behalf of its shareholders. This proposition, if it represents the law, must be of fundamental importance and there is, it seems, considerable authority in its support.

Dicta in certain cases suggest that a company may be the agent of its members where one shareholder beneficially owns the entire share capital 7e including, for example, in Pegler v. Craven  and Devlin J.’s somewhat guarded comments that  “ . . . the proposition might in loose talk pass muster in the case of the 100 per cent Shareholder.”

 But it is a proposition which does not appear ever to have been applied to decide a case, and which is contrary to the decision in Salomon v. Salomon 4 Co. Ltd., where the six minority shareholders were all, to all intents and purposes, the mere nominees of Salomon, the majority shareholder. The House of Lords nevertheless specifically rejected the suggestion that the company was the agent of the latter. Further, the dicta to this effect in Pegler v. Craven were subsequently discussed and rejected by a unanimous Court of Appeal in Tunstall v. Steigmann. Subsidiary companies constitute a special case within the preceding category, for by definition they must always be controlled by another company. Again, however, the existence of complete control does not, of itself, establish that the subsidiary is the agent of its holding company. This is confirmed by William Cory Son Ltd. v. Dorman Long 4 Co.., Ebbw Vale U.D.C. v. South Wales Traffic Area Licensing Authority 84 and merchandise transport limited v British transport commission

THEORIES OF CORPORATE PERSONALITY

  1. Fiction theory:- this theory is mainly propounded by Savigny, Salmond, Kelson and Holland . According to this theory a corporation is clothed with a legal personality. The personality of a corporation is different from its members.  Savigny regarded corporations as an exclusive creation of law having no existence apart from its individual members who form the corporate group and whose acts by fiction are attributed to the corporate entity .as a result of this change in the membership does not affect the existence of the corporation or its unity . savigny further pointed out that there is double fiction in case of a corporation. By one fiction the corporation is given a legal entity, by another it is clothed with the will of an individual. Thus, fictitious personality of a corporation has also a will of its own which is different from that of its members.

Kelson also regards legal personality a fiction. To quote his words “it is convenient peg upon which to hang legal rights and duties. Thus a group of persons or a successive series of person is a legal person because it has an imaginary personality by fiction of law”.

Salmond also supports the view that a corporation has a fictitious existence. It is distinct from its members and capable of surviving even after all the members have ceased to exist. Gray justifies fiction theory on the ground that the main object of incorporation is to protect the interest of persons having common objectives. Like fictitious personality, the will of the corporation is also an imaginary creation of law.[21]

The fiction theory thus believes that incorporation is a fictitious extension of personality resorted to for the purpose of facilitating dealings with property owned by a large body of natural persons. The fiction theory, however, answer satisfactorily the civil and criminal liability of corporations. If it is assumed that the will of the corporation is attributed to it by the fiction of law then it leads to infer that it must always be lawful as the will conferred by law can never be for unlawful and illegal ends.

However this theory has been criticised by Sir Fredrick Pollock on the grounds that under English law neither collective liabilities nor collective power can be enjoyed by the body of individuals unless they are duly incorporated under the existing laws. Therefore unincorporated bodies are not treated as legal person.

  1. Realist theory: – also known as organic theory, was propounded by Glerke, a german jurist . He believed that every collective group has a real mind, a real will, and a real power of action. A corporation therefore has a real existence irrespective of the fact whether it is recognised by the state or not. The corporate will of the corporation finds expression through the acts and directions of its directors, employees or agents.  The existence of the corporation is based on reality and not fiction. It is a psychological reality and not physical reality. Gray, however denies the existence of collective will.  He calls it a figment this theory has also been supported by some other jurists like Bluntschli, Beseler Miraglia, Pollock, Maitland and Dr. Jethrow Brown. Dicey also contends that the personality of a group is the reflection of its consciousness and will. Thus group personality is as real as the personality of an individual.

However this theory has been criticised by J.C. Gray as he contended that collective will have no reality, it is nothing more than mere fiction. Salmond also says that even it is assumed that that the group will is reality, the reality of the unitary notional entity which may in law survive the last of its members cannot be conceded to .moreover he further contends that the realist theory cannot be applied in case of a corporation sole because it is simply a series of natural persons whose rights are different from those natural  persons in general and in case of corporation aggregate personality is nothing more than a metaphor and a fiction.[22]

  1. Bracket theory:- Ihering propounded this theory of corporate personality .according to this theory juristic personality is only a symbol to facilitate the working of corporate bodies. Only the members of corporations are “persons” in real sense and a bracket is put around them to indicate that they are to be treated as one single unit when they form themselves into a a corporation .this theory has been advocated by American jurist Hohfeld in a different form, in his view corporate personality is creation of arbitrary legal rules designed to facilitate proceedings by and against an incorporated body in the court of law. His theory has been criticised on the grounds that as it does not specifies as to when the bracket are to be removed and when the corporate mask be lifted for taking note of persons constituting the corporation.
  2. Concession theory:– this theory presupposes that corporation as legal person has has great importance because it is recognised by the state or the law. According to this theory, juristic personality is a concession granted by the state to a corporation. It is entirely at the discretion of the state to recognise or not to recognise a juristic person the theory closely resembles the fiction theory as it also believes that there is no juristic personality apart from the creation of law. It is for this reason that the fiction theory is being accepted by the followers of this theory[23]. This theory deviates from the fiction theory in as much as it emphasis on the discretionary power of the state in matter of recognising the corporate personality of the corporation. Some critics consider the theory dangerous because of its over emphasis on the discretionary power of the state in regard to recognition of a corporation or not. In this view it may lead to dictatorship and arbitrary restrictions on corporate bodies, particularly the political entities.[24]
  3. Purpose Theory:-This theory was propounded by Brinz, on the view that corporations are treated as persons for certain specific purposes. The assumption that only living persons can be the subject matter of rights and duties would have derived imposition of rights and duties on corporations which are non living entities .it therefore became necessary to attribute “personality” to corporations for the purposes of being capable of having rights and duties.

These different theories were analysed by Dr. Friedmann who concluded that almost all of the theories had a political significance and their role in attending the legal problems has been secondary.

Advantages and disadvantages of separate legal entity concept[25]

Legal protection

 Forming a corporation offers legal protection because the business owner becomes a separate entity from the incorporated company, Inc. notes. This distinction protects business owners from personal lawsuits and corporate liabilities and secures their personal assets. A C corporation can be sued since it serves as its own entity. That means the company and all of its assets and equity are exposed to risks, while the owners remains safe.

Liability and Taxation

“Since a corporation is a separate and distinct legal entity, owners of a corporation are only indebted to the extent of their interest in the corporation,” according to Business Accent. This means that shareholders are not personally liable for any company debt and creditors cannot go after their personal assets for business debts. Similarly, shareholders only pay taxes on any profits paid to them as salaries, bonuses or dividends and the corporation itself pays corporate rate taxes on any additional profits at the lower corporate rate.

Perpetual Existence

The main advantage of a corporation is its perpetual existence. Since the corporation is a separate legal entity from any of its owners, it does not dissolve when one owner leaves. If a shareholder dies, the company may transfer her shares in the same way as any other property, and the corporation is not negatively affected. This also allows a shareholder to disconnect from the corporation by selling all of her shares without ending the corporation. Keep in mind that when deciding to dissolve a company there are procedures and paperwork required.

Disadvantages

While a corporation offers many advantages, those same qualities can also make life more difficult. It costs money to incorporate your business, as “start up, operating and tax costs are not required of most other structures,” reports Business.gov. Corporations have rules to follow and you must adhere to the formalities of organizing and running the company. Increased business regulations lead to a large amount of paperwork required to both incorporate and keep accurate tax, business and monetary records as required by la

Liability of corporations[26]

Corporations are legal persons .it means that they have rights and liabilities .so far as rights are concerned there is no difficulty in their enforcement .But the liabilities of corporations present very complicated problems. How are the liabilities of an entity which is treated as person only by a fiction of law to be enforced against it? This problem shall be discussed under three headings:-

  1. Liability of a corporation in contract: For entering into a contract two things are important i.e. the form of the contract and the capacity of the parties, a corporation has no material existence therefore it always through its agents. It signifies its assent through seal. Therefore the presence of the seal is considered as evidence of the assent of the body corporate. The power of the corporation to enter into contract is limited by the statute .and anything beyond the words of the statute is rendered as ultra vires. Therefore the corporation formed under a statute is liable only for the acts done within the ambit of the statute.
  2. Liability of corporations of torts: as observed earlier a corporation always acts through its agents therefore the liability of the corporation for the torts is based on the principle of vicarious liability. A corporation is liable for the acts of its servants done in the course of employment but this rule applies only to those acts which are intra vires the corporation. Two things are taken into consideration while imposing the liability upon the corporation i.e. whether the act was done by the authority of the corporation or the act was done without the authority of corporation for the acts done with authority the corporation is liable but for the acts done without the authority the corporation could not be made liable.
  3. Liability for criminal acts:- the earlier view was that the corporation cannot be made liable for criminal offences for the theoretical difficulties like how to attribute mens rea to the corporations and how can a corporation be punished. The procedural difficulties have been now been removed partly by legislations and partly by judicial decisions and in the recent years the corporations have been made liable for the criminal acts .for instance:- in the case of D.P.P. v Kent and Sussex contractors[27] where the manager of the company has sent in false returns for the purpose of obtaining petrol coupons the court held the company liable and said that though the act was done through the manager the company was liable for the acts. In another case of Moor v Bresler Ltd. The court held the company liable for the criminal acts of the secretary. Moreover a suit can be filed against the company in the capacity of juristic person.

CONCLUSION

Therefore from the analysis of the studies of different theories on corporate personality undertaken as a part of this project it can be concluded that the concept of separate legal entity is of great importance as it imposes rights and duties on non living persons by attributing legal personality to them. Clothed with the legal personality these corporations can own, use and dispose of property in their own name. Moreover in case of any dispute such conferment of title of legal personality enables the entity to sue or be sued in its own name. Therefore in the light of above statements the concept of separate legal entity cannot be regarded as a sham concept, though not real but not fully fictitious as well.

Edited by Amoolya Khurana

[1] /Thesis.pdf last accessed on 28th march 2014.

[2] Fitzerland p.j.”salmond on jurisprudence (12th edition) p:299.

[3] Dr n.v. paranjape “studies in jurisprudence legal theory,5th edition, central law agency.

[4] Id.

[5] Supra (1)

[6] P.J.Fitzgerland, “Salmond on jurisprudence”,Ed. 12.universal law publishing co.pvt.ltd.pg 66.

[7] Harrods ltd v lemon (1931) K.B. 157           

[8] Warzel v hughton (1937) K.B. 380

[9] G.W. PATON “A TEXTBOOK ON JURISPRUDENCE” Ed.4, Oxford University Press.

[10] G.W. PATON.,”A TEXTBOOK ON JURISPRUDENCE”,ED.4TH ,oxford university press.

[11] Id.

[12] [18971 AC 22 HL

[13] Dan-Cohen M, Righzs, Persons and Organisa¢ions: A Legal Theory For Bureaucratic

Society, University of California Press, Berkeley (1987) at 44

[14] Dewey, ’The Historical Background of Corporate Legal Personality” 35 Yale Law

JOURNAL ,(1926) 655 at 656.

[15] Lord MacNaughten in Salomon at 51.

[16]  in Farmers Loan & Trust Co v Pierson

[17] Per Vaughan Williams J [1895] 2 Ch at 323,  Lindley LJ at 336.

[18] http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1081&context=blr

[19] (1961) AC 12

[20] (1976) 137 CER 1

[21] V.N. Paranjape,”studies in jurisprudence legal theory”, central law agency.p 330

[22] Id.

[23] Dicey A.V. “the law of the constitution”, Ed. 8th

[24] V.N. Paranjape,”studies in jurisprudence legal theory”, central law agency.p 330

[25] http://smallbusiness.chron.com/advantages-disadvantages-forming-corporation-3896.html, “advantages and disadvantages of a corporation. last accessed: 30th march 2014.

[26] Dr. B.N. Mani Tripathi,” jurisprudence Legal Theory” ed.17th ,Allahabad law agency

[27] 1944 K.B. 146

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