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Critically discuss the concept of separate legal entity and its legal consequences and significance for participants, creditors and the economy generally

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Introduction

The concept of separate legal entity: The double-edged sword Critically discuss the concept of separate legal entity and its legal consequences and significance for participants, creditors and the economy generally Introduction: the Concept of Separate Legal Entity A legal person is described as any human or otherwise who has rights and duties by law. In modern civilized communities all human persons fall into this category however this was not always the case e.g. the slave trade. The concept of the separate legal entity of a company recognizes a company, once incorporated, as a legal person and thus is to be regarded as separate from its members. Assuming limited liability and identified by distinct membership, property ownership, share transferability, perpetual succession, and the other attributes of incorporation, the corporation has many economically and socially beneficial functions. Legal entity distinct from its members One of the most fundamental attributes of the corporate personality is that the corporation is a legal entity distinct from its members. It can benefit from rights and be subject to duties different from those of its members. It was not until the case of Salomon v Salomon & Co. that the implications of this attribute were truly understood even by the courts. Having run a prosperous business for many years Solomon decided to convert into a limited liability company formed with the required number of shareholders: himself, his wife and his five children. ...read more.

Middle

Property Property of the corporation belongs solely to the corporation and the members have no proprietary rights they only have the right to the value of their shares. As directors exit and are replaced through death, resignation or otherwise, the effect on incorporated companies is much smaller than in a partnership. This is because on the physical level the corporation is left unconcerned, the change simply results in the transfer of shares. Of course a change in a manager plays a huge role but much smaller than in a partnership where a change in membership which would cause division of property and other assets, hugely altering the standing of a company. For shareholders and employees this promotes stability and security. Most cases share prices are paid upfront thus entry and exit is relatively simple, and done by only transferring shares. This ease of change makes a shareholder's investment much more liquid and attractive. However after incorporation, a trader will cease to have an insurable interest in the company's assets even if he is the owner of all the shares. Thus if he forgets to assign the insurance policies, nothing will be payable. This was the case in Macaura v. Northern Assurance Co. (1925). Mr. Macaura owned an estate and some timber. He agreed to sell all his timber for the entire share capital of Irish Canadian Saw Mills Ltd. The timber, amounting to approximately the entire assets of the company, was stored on the estate. Mr. ...read more.

Conclusion

This is due to this type's need for capital which is facilitated by the division between shareholders and the board, transferable shares, and the limited liability on shareholders. Large professional firms that do not require as much capital often happily perform under partnerships. Incorporation extended to a single trader or a small partnership facilitates the access to capital without which they may not prosper. However the real issue is how easily these small firms should be allowed to become incorporated. The main concern is the benefit of limited liability since it has a huge impact on potential third parties (often creditors) engaging in business with these companies. The fear is that rather than to raise capital from the public, these firms are aiming to create an entity between themselves and their creditors. The decision in Salomon v Salomon & Co Ltd exemplifies this double-edged sword of the principle. On one hand it enables corporations to possibly become capital rich. But on the other hand extending these benefits of incorporation to small companies, it has promoted fraud and the evasion of legal obligations. The flaw lies in the fact that it creates the ability for some to hide behind the "corporate veil" which can be a very powerful and dangerous weapon in the hands of those with fraudulent tendencies. The courts have thus decided to ignore the limited liability doctrine in specific cases, and "lift the veil" for those companies formed or used for fraudulent behavior. ...read more.

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