The Principle of Separate Legal Entity in Corporation Law

A corporation is a separate legal entity by law. It has a separate identity from its owners who are called stockholders. It does not mean the corporation has the voting right but he is liable to pay taxes. The partnership firm differentiated with the company. The company provides a “veil” that protects its shareholders from personal liability whereas partnership firm does not provide a “veil” (Bottomley, Hall and Spender, 2018). The corporation is very different to deal in legal terms. In partnership firm, it will only affect the capital of him and his partner. If the Sole proprietor is making any decision, he is only risking his capital. Whereas in corporation, the managers of the corporation making any decision they are risking the capital of others, the shareholders capital they are risking. In a case of Solomon V A Solomon and Co. Ltd. [1897] AC 22, it is had been described that the company role and the role of the owner in the company. The future of separate legal entity necessary that it requires that whether any amendment in current law. It will require by taking more cases of Corporation law that why it is necessary to amend these changes.

Aaron Solomon case has been considered the major case for the rule of Separate legal entity.  Judge, Vaughan Williams J. in the ruling said that Mr Solomon created the company with the only purpose to transfer the company. The judge considered that Company was agent and the Solomon was principle. Mr Solomon also appealed against this order but that appeal is also ruled against him. It was ruled by the court that Mr Solomon had misused the privileges of incorporation that was conferred for bona fide shareholders. He incorporated the company was just a scheme and described the company is just a fiction and a myth. However, the House of Lords overturned this decision said that Mr Solomon had made the company with all requirement and rejected the arguments of the agent-principal and the fraud. He held that only seven members are required to hold at least one shares according to the Companies Act, 1862. The company is a separate person created by law and considered as a legal person that had a different identity from its shareholders. The company was principal and Solomon was his agent, hence the business does not belong to the Solomon but it belongs to the Company. Even though the business will remain same after the incorporation and his managers and they only receiving the profits but after the incorporation the “veil” had provided to its shareholders which protects the shareholders from the liability but only to an extent that is provided by the law.

Comparing Corporations to Partnership Firms and Sole Proprietorships

After this case, the law of separate legal entity has been established all over the world. Before this case where the Australian courts considered the company and its owners are same, but due to this case, the concept of separate legal entity had evolved. The company has its role, it legally liable for any wrong act and considered as a separate legal person. Limited liability advantage is that trading through the medium will only liable toward payment of its debts to a limited extent. The company if limited by shares than the shareholder can sell their shares on the nominal price.

A corporation is a separate legal entity; it has a separate identity from its owners. It is incorporated under the Corporations Act 2001. The Corporation Act, 2001, governs company’s activities that administered by the Australian Securities and Investment Commission (ASIC, 2018). The board of directors are its mangers and its officers operate it. In Lord Summer in Gas lighting Improvement Co Ltd V Inland Revenue Commissioners (1923) AC 723 it was ruled that the company is a separate legal entity. The court had justified that why the company have a separate legal entity. The shareholders liability is decreased, as they do not have to manage the company, the managers of the company are expertise to operate the company. The managers invest the money in the market on the gain and loss the shareholders had been paid incentives. The shareholders of the company can sell their shares at discounted rates if the managers failed to operate the company. Any debt raised by the company, the company is only liable for that debt. Shareholders will not be liable for any debt raised by the company. It can be concluded that the company organisation structure as compared to partnership firm and sole proprietor is very different. In company, the one who invest the capital is not necessary that he will manage the company. The board of directors and the leadership team are the one who manages the company. The shareholders are the one who invest in the company. Therefore, the company and shareholders cannot be treated that they both are same but they are distinguished personalities.

The future of corporation law as detailed in the legal principle of Solomon case. Solomon case shows that the incorporation of the company with all compliances as said by the act (TIA, 2018). In another case that was related to Solomon case Lee v Lee’s Air farming Ltd (1961) UKPC 33, AC 12, Mr Lee had a crop laying business, formed his business into a limited company. Due to a flying accident Mr Lee was died and his wife asked the compensation from the state. His wife argued that he is a worker under the law but state argued that he is the owner of the company and will treated as self-employed. The court ruled that the company is a separate legal entity and Mr Lee can be the employee of the company. This ruled which separate company from its owner that goes against the plaintiff in this case. It can be said that Solomon hundred year old case from which the modern business has emerged. This law provides the protection to shareholders private assets. This law helped to facilitate the business and international trade. It is required to some advancement, in the case that this law cannot be challenged.

Case Studies in Corporation Law

In a few other cases where the court has treated company and the one who own that company is the same person. In Peate v federal Commissioner of taxation (1964) 111 CLR 443 in this the courts had acknowledged that the company is pierced that deny shareholders the protection that veil provides. However, the rule is same which is observed by the Supreme Court also that the corporation and the owners are different. The company has its own legal identity, but in few exceptional cases, it becomes necessary to remove the Veil to check the reality of the corporation. From this, it can be concluded that the future of Solomon case that says company is a separate legal entity cannot be functioned in future, because from the above cases it can be observed that this rule does not function in every case and due to that, it can say that changes are required in the current law. The Government is required to make amendments in the company law. There is required to implement strict laws to make the concept of separate legal entity stronger. There are heavy fine must be opposed who misused this law for any fraud motive (Tomasic, and Bottomley, 2002).

Conclusion

In conclusion, it can say that the corporation is a separate entity from its owners. It provides a veil to its shareholders that protect his from any personal liability. The corporation is very different from partnership firm and Sole Proprietor as in this both liability of the owners and the organisation are the same but not in the case of Company. In Solomon V A Solomon and Co. Ltd. [1897], in the case the company has, a separate identity is ruled by the court. The company has followed all the compliances that every shareholder has a share that is required by the act. It is not the case of fraud as said by the court and in this, it is stated that the company is the principal and the Solomon is the agent of the company. In contradictory to this case, some of the cases where the company and the owner regarded as the same and the corporate veil can be pierced in some cases. Therefore, it concluded that in current law it is required to amend some of the changes in the Act

References

Australian Securities & Investment Commission. (2018) Your business Structure. [Online] ASIC. Available from: https://asic.gov.au/for-business/your-business/your-business-structure [Accessed 8/08/18]

Bottomley, S., Hall, K., and Spender, P. (2018) Contemporary Australian Corporate Law. United Kingdom: Cambridge University Press.

LawTeacher. (2013) The Principle of Salomon. [Online]. Available from: https://www.lawteacher.net/free-law-essays/business-law/the-principle-of-salomon-business-law-essay.php?vref=1 [Accessed 11 August 2018].

Lex Vidhi. (2018) Case Study on a Separate Legal Entity of a Company. [Online] Lex Vidhi. Available from: https://www.lexvidhi.com/article-details/case-study-on-separate-legal-entity-of-a-company-129.html [Accessed 7/08/2018]

TIA. (2018) Legal Bussiness Structure. [Online] TIA. Available from: https://dpipwe.tas.gov.au/Documents/Legal-Business-Structures.pdf [Accessed 9/08/18]

Tomasic, R., and Bottomley, S. (2002) Corporations Law in Australia. Sydney: The Federation Press.