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Company as a Separate Legal Entity

Categories: BusinessCompany

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.

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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.

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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, expending business, securing debts, attracting investors, retaining professional setup and engaging professional management, promoting & achieving new ideal, expanding its activities at local to global level. Under Separate Entity Concept, Corporation is treated in its own capacity, but it is not a human being, it is an artificial being, therefore, it has to be managed by people in different capacities such as owners,

The shareholders were Mr. Salomon,his wife, daughter and four sons. Two of his sons became directors; Mr. Salomon himself was managing director. Mr. Salomon owned 20,001 of the company’s 20,007 shares – the remaining six were shared individually between the other six shareholders. Mr. Salomon sold his business to the new corporation for almost ? 39,000, of which ? 10,000 was a debt to him. He was thus simultaneously the company’s principal shareholder and its principal creditor. Transfer of the business took place on June 1, 1892. The purchase money the company paid to Mr.

Salomon for the business was ? 20,000. The company also gave Mr. Salomon ? 10,000 in debentures: that is, Salomon gave the company a ? 10,000 loan, secured by a charge over the assets of the company. The balance paid went to extinguish the business’s debts (? 1,000 of which was cash to Salomon). Soon after Mr. Salomon incorporated his business a series of strikes in the shoe industry led the government, Salomon’s main customer, to split its contracts among more firms. The government wanted to diversify its supply base to avoid the risk of its few suppliers being crippled by strikes.

His warehouse, as a consequence, was full of unsold stock. He and his wife lent the company money, and he cancelled his debentures, but the company needed more money, so they sought ? 5,000 from a Mr. Edmund Broderip. Mr. Salomon assigned Broderip his debenture, the loan with ten per cent interest and secured by a floating charge. But Salomon’s business still failed, and he could not keep up with the interest payments. In October 1893, Broderip sued to enforce his security. The company was put into liquidation. Broderip was repaid his ? ,000, and the debenture was reassigned to Salomon, who retained the floating charge over the company JUDGMENT High Court: When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud. The judge, Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors.

Court Of Appeal: The Court of Appeal also ruled against Mr. Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability, which the Legislature had intended only to confer on “independent bona fide shareholders, who had a mind and will of their own and were not mere puppets”. The Lords: The House of Lords unanimously overturned this decision, rejecting the arguments from agency and fraud. They held that there was nothing in the Act about whether the subscribers (i. e. he shareholders) should be independent of the majority shareholder. The company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient. The 1862 Act created limited liability companies as legal persons separate and distinct from the shareholders. Lord Halsbury stated that the statute “enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others. Lord Halsbury remarked that – even if he were to accept the proposition that judges were at liberty to insert words to manifest the intention they wished to impute to the Legislature – he was unable to discover what affirmative proposition the Court of Appeal’s logic suggested. He considered that identifying such an affirmative proposition represented an “insuperable difficulty” for anyone putting forward the argument propounded by the lord justices of appeal.

Lord Herschell noted the potentially “far reaching” implications of the Court of Appeal’s logic and that in recent years many companies had been set up in which one or more of the seven shareholders were “disinterested persons” who did not wield any influence over the management of the company. Anyone dealing with such a company was aware of its nature as such, and could by consulting the register of shareholders become aware of the breakdown of share ownership among the shareholders.

Lord Macnaghten asked what was wrong with Mr. Salomon taking advantage of the provisions set out in the statute, as he was perfectly legitimately entitled to do. It was not the function of judges to read limitations into a statute on the basis of their own personal view that, if the laws of the land allowed such a thing, they were “in a most lamentable state”, as Malins V-C had stated in an earlier case in point, In Re Baglan Hall Colliery Co. , which had likewise been overturned by the House of Lords.

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Company as a Separate Legal Entity. (2018, Oct 07). Retrieved from

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