Incorporation. Upon incorporation a company comes into existence and thereby assumes legal personality having rights and obligations as it were like a natural person. The common law position is that once stipulated registration requirements have been met

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Upon incorporation a company comes into existence and thereby assumes legal personality having rights and obligations as it were like a natural person. The common law position is that once stipulated registration requirements have been met, a corporation becomes a judicial person distinct from its members or promoters. It can now own property, sue, be sued, and enter into contracts because of the law of the legal personality doctrine that the law attaches to incorporation.

Related to legal personality is limited liability. Limited liability dates back to the Joint stock Companies Act 1844 and the Limited Liability Act of 1855. It is a default rule which separates and protects the acquired property of a company from those of its members. The company pays its debts, and so do members pay their debts. That is to say the doctrine shifts the risk of business from the shareholders to creditors. When a company fails, the creditors swallow the loss instead of shifting it to the members, yet if all went well, members are residual claimants. This has undoubtedly helped to make possible the growth of the large modern companies that today dominate the private sector of the economy.

The exception to the rule is fraud or an express statement to the contrary short of which liability of members stops, at which each signed up to at the assumption of membership. Claims are therefore , legally confined to available assets of the company. Personal assets of members are not part of the company assets. If it were not a rule, investors would risk less in business for fear of losing personal assets should the business collapse.

Having limited liability ‘cheaply’ and ‘easily’ available is to remove unnecessary legal bars which can be an inhibition to progress of economic activity. Incorporation process should be straight forward, and cheap, and importantly once the company is incorporated the rule follows without question. But despite the arguments that the same protection offered to risk takers be accorded to the larger society, the rule has continued to be cheap and easily available. This is because of the following;

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  1. Business involves potential risks, limited liability comes in as a motivation in case of failure. This potentially attracts as many people into business through capital injection effectively becoming a ‘contracting tool and financing device’. Hence investors are certain that their personal assets are safe as the rule is a kind of security. Market forces are unreliable. The rule caters for this economic reality, and effectively allows room for honest business errors and commercial failures. It is this flexibility that business people enjoy which makes the rule a suitable business vehicle. This, in the long run, stimulates economic prosperity ...

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