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04th
July 2009
The doctrine
of separate personality
A
partnership is a group of individuals trading
together with the view of making a profit. Each
partner is personally liable for the debts of
the business. On the other hand, in a company,
there is the doctrine of separate personality,
which means that the company has a distinctive
legal personality to the individual members
of the company and as such the company is liable
for any debts incurred not the individual shareholders
in their own capacity.
The English case of Salomon v. Salomon (1897)
is considered one of the leading authorities
of Company law, in particular the application
of the doctrine of separate legal personality.
Mr. Salomon had a family business in the boot
and leather trade. He had formed a limited company
and incorporated his old business. Payment was
in form of cash, shares and debentures. The
company was eventually wound up, but it was
argued that Mr. Salomon and his company were
one in the same. The House of Lords ruled that
Mr. Salomon and his company were not one in
the same, and that the company had a separate
legal personality.
The benefits of forming a company include the
following: with its own separate legal personality,
the owners and shareholders of the company are
protected from incurring personal debts if the
company needs to be wound up, as seen in the
case of Salomon. In other words, the personal
assets of the shareholders are not at risk to
satisfy corporate debts or liabilities.
A further point is that the company is taxed
separately from its owners. They would pay taxes
on corporate profits paid to them from their
salaries, bonuses and/or dividends. This appears
to be a smart venture as there is a built -in
business structure for investors. There is also
a capital incentive as corporations can catch
the attention of gifted employees by offering
their own share options in the company.
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The
owner that works for himself or herself may
become an employee and as such would qualify
for deductions in expenses such as health and
life insurance. There is also a set management
structure in place: the owners of the corporation
are also shareholders in the business; there
is a Board of Directors elected by the said
shareholders, and all of the shareholders do
not necessarily participate in the operation
of the business.
There are some drawbacks of setting up a company
including the time and expense: it can take
some time to get all the documents in order
and to register the company. The paperwork,
formalities, and expense means that small businesses
prefer to form partnerships which would save
time and money. It is a requirement to disclose
the names of the corporate officers and Directors
and notify in writing if any of these change.
Dissolution of the company is complicated and
costly, and finally there are tax consequences
which flow from the formation of a company.
A company, like a real person can enter into
contracts, sue and is sued, pay taxes, and do
other things that are necessary for conducting
a business. The exception is when the courts
decide to lift the veil of incorporation, which
means the company and its owners are no longer
treated as separate, but one legal personality.
It is difficult to predict when the courts will
lift the corporate veil.
Ms. Trudy O.
Glasgow is a practising attorney at the law
firm Gordon, Gordon & Co., (and has also
taught law at University level in the UK)*
This column is for general use only, for advice
specifically for your case, please see your
lawyer.
Next week:
Lifting the veil
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