• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

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

Extracts from this document...

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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Structures, Objectives & External Influences section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Structures, Objectives & External Influences essays

  1. Marked by a teacher

    ASDA's Ownership

    4 star(s)

    company and since the takeover WAL-MART have introduced their rules, uniform, rates of pay etc and this has caused the employees of ASDA to change their mind. The Wines Plus stakeholders (the customers only) are affected by changes of the shop layout and if there has been any takeovers/mergers etc and if the business closes down.

  2. Political, legal, social factors affacting Tesco.

    Inflation is important for Tesco because if it rises prices and the wages of customers would increase, lowering sales and profit. But if it decreases then they would maximise sales but not make as much profit. I think that Tesco could compete better by having a better quality of products

  1. Critically evaluate the arguments for and against globalisation, and discuss if such claims are ...

    Stiglitz (2002) argues, globalisation has not produced the promised benefits but he does not question that globalisation has benefited the poor. By globalisation benefiting the poor it certainly has its knock-on effects. Coastal shrimp farmers in India although, this was helping to reduce poverty, were harming the surrounding mangroves because of discharge of chemicals.

  2. The Business Environment Coursework. Describe the type of business, purpose and ownership of ...

    For example M&S no longer sell any eggs from caged hens and do not work with any companies that may be involved with child labour, for example for manufacturing clothes. M&S also understand that many of their customers are willing to spend extra on free range eggs and organic meat,

  1. For my portfolio, I was asked to do an assignment on two businesses. I ...

    created new jobs and they have changed the total value of their customers. The opening of new stores has created many jobs all over the world Tesco employed nearly 260,000 employees in 2002 an increase of 20,000 in a year and Tesco now employees more than 300,000 employees all over the world.

  2. Introduction to incorporation.

    companies must file accounts which are available for public inspection. (l) A company can create a security over its assets called a floating charge, which permits it to raise funds without impeding its ability to deal with its assets. A partnership cannot create a floating charge.

  1. Introduction to J Sainsbury plc

    This means that Sainsbury's may be slow to react to changes and challenges. This will result in jobs not being completed on time. Span of control will refer to the number of employees who are directly supervised by one person.

  2. Explain the legal and ethical issues in relation to the use of business information

    would not be able to give this information under the DPA 1998.If the organisation denies giving this information under the FOIA (2000) they have to explain why they con not give this information. An example of someone receiving this information would be when someone needs information on their criminal record from the police, under the FOIA (2000)

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work