Unit 5.5: The Separate Entity Doctrine
“It is a basic doctrine of company law: that for certain purposes a company is a legal entity separate from the legal persons who became associated for its formation or who are now its members and directors. For certain purposes, there is a corporate screen around the members and directors. This is often referred as to the ‘Veil of Incorporation.’ The authority for that proposition is the leading case of Salomon v Salomon & Co Ltd  AC 22.
The corporate veil shields the members and the directors from the liabilities of the company. The separate entity doctrine applies to one person company.
There are limits to the separate entity doctrine:-
Examples under the Companies Act 2001:
Section 162 imposes a duty on the board of directors to consider the appointment of a liquidator where the company is unable to pay its debts.
S 162. Duty of directors on insolvency
1. A director of a company who believes that the company is unable to pay its debts as they fall due shall forthwith call a meeting of the Board to consider whether the Board should appoint a liquidator or an administrator. 2. Where a meeting is called under this section, the Board shall consider whether to appoint a liquidator or an administrator, or to carry on the business of the company
3. Where –
a. a director fails to comply with subsection (1):
b. at the time of that failure the company was unable to pay its debts as they fell due; and
c. the company is subsequently placed in liquidation, the Court may, on the application of the liquidator or of a creditor of the company, make an order that the director shall be liable for the whole or any part of any loss suffered by creditors of the company as a result of the company continuing to trade. 4. Where –
a. at a meeting called under this section the Board does not resolve to appoint a liquidator or an administrator; b. at the time of the meeting there were no reasonable Grounds for believing that the company was able to pay its debts as they fell due; and c. the company is subsequently placed in liquidation,
the Court may, on the application of the liquidator or of a creditor of the company, make an order that the directors, other than those directors who attended the meeting and voted in favour of appointing a liquidator or an administrator, shall be liable for the whole or any part of any loss suffered by creditors of the company as a result of the company continuing to trade.
Duty owed by director to the company → Section 162.
If the company is subsequently placed in liquidation, the Court on application by a liquidator or creditor, may order that directors (other than those who voted in favour of appointing a liquidator) will be liable.
Unless at the time of the meeting, there were no reasonable grounds for believing that the company was able to pay its debts as they fell due.
Unit 5.12: Suggested readings
• Business Law by James Marson (26 May 2011)
• Business Law by David Kelly, Ruth Hayward, Ruby Hammer and John Hendy (29 Mar 2011)
• Business Law by Ewan MacIntyre (3 Feb 2010)
• Contract Law by Catherine Elliott and Frances Quinn, Jun 2011
DefinitionSave to FavoritesSee Examples
A legal entity, typically a business, that is defined as detached from another business or individual with respect to accountability. A separate legal entity may be set up in the case of a corporation or a limited liability company, to separate the actions of the entity from those of the individual or other company.
Read more: http://www.businessdictionary.com/definition/separate-legal-entity.html#ixzz2haFivqql
http://www.studymode.com/essays/Company-As-a-Separate-Legal-Entity-1170914.html COMPANY AS A SEPARATE LEGAL ENTITY
A legal entity, typically a business, that is defined as detached from another business or individual with respect to accountability. A separate legal entity may be set up in the case of a corporation or a limited liability company, to separate the actions of the entity from those of the individual or other company. Meaning:
If a business is a separate legal entity, it means it has some of the same rights in law as a person. It is, for example, able to enter contracts. In New Zealand, a company is a separate legal entity from its owners (shareholders) and can, for example, be sued, and enter into contracts in the name of the company, not the shareholders. Sole traders and partnerships are not separate legal, entities from the owners. Some Business entities like corporation, LLC can exist separately from its owners. In a common language that a corporation is a separate entity of its owners and corporation itself is an entity like human being created through legal or official process.
Corporation lives and does its activities at its own existences and is treated in its own capacity. It does the business, it generates the revenue, it can incur losses, it hires the employees and it pays its own taxes.
It is a better form of existence for the reason it takes its responsibilities itself, owners are free from their personal liabilities and owners enjoy limited personal liability (risk) only up to their investments in stocks, though there may be certain situations where their personal responsibilities can exceed from limited liability concept.
Separate Entity Concept is better choice and it has better features because corporation enjoys separate entity concept, has indefinite life (perpetual). Management and ownership may change but corporation will exist indefinitely at its own existence, unless it is officially dissolved or merged.
Corporation has a better scope for large & multiple businesses,…[continues]
A form of business in which one person owns all the assets of the business, in contrast to a partnership or a corporation. A person who does business for himself is engaged in the operation of a sole proprietorship. Anyone who does business without formally creating a business organization is a sole proprietor. Many small businesses operate as sole proprietorships. Professionals, consultants, and other service businesses that require minimum amounts of capital often operate this way.
A sole proprietorship is not a separate legal entity, like a partnership or a corporation. No legal formalities are necessary to create a sole proprietorship, other than appropriate licensing to conduct business and registration of a business name if it differs from that of the sole proprietor. Because a sole proprietorship is not a separate legal entity, it is not itself a taxable entity.
The sole proprietor must report income and expenses from the business on Schedule C of her or his personal federal income tax return. A major concern for persons organizing a business enterprise is limiting the extent to which their personal assets, unrelated to the business itself, are subject to claims of business creditors.
A sole proprietorship gives the least protection because the personal liability of the sole proprietor is generally unlimited. Both the business assets and the personal assets of the sole proprietor are subject to claims of the sole proprietorship’s creditors. In addition, existing liabilities of the sole proprietor will not be extinguished upon the dissolution or sale of the sole proprietorship.
Unlike the managers of a corporation or a partnership, a sole proprietor has total flexibility in managing and controlling the business. The organizational expenses and level of formality in a sole proprietorship are minimal as compared with those of other business organizations. However, because a sole proprietorship is not a separate legal entity, it terminates when the sole proprietor becomes disabled, retires, or dies. As a result, a sole proprietorship lacks business continuity and does not have a perpetual existence as does a corporation.
For working capital, a sole proprietorship is generally limited to the individual funds of the sole proprietor, along with any loans from outsiders willing to provide extra capital. During her lifetime, a sole proprietor can sell or give away any asset because the business is not legally separate from the sole proprietor. At the death of the sole proprietor, the business is usually dissolved. The proprietor’s estate, however, can sell the assets or continue the business.
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Topic: The doctrine of separate legal entity
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