The reason why we have to consider a company as a legal person
Journal of Corporate Law Studies, January 2018 Show
36 Pages Posted: 29 Dec 2018 Susan WatsonUniversity of Auckland Business School; European Corporate Governance Institute Date Written: January 12, 2018 AbstractThe argument set out in this article is that the modern company is a creature of the state, with corporate legal personality derived from the state through the process of incorporation. Once incorporation takes place a legal person is created. Status as a legal person is different to the type of sociological personality that a group of individuals may develop organically that is recognised by the law. Also status as a legal person means corporate legal personality is more significant than just a shortcut mechanism to describe a collective of individuals or a set of characteristics. It is argued that the modern company is a nexus for contracts; a legal entity that is a legal person that derives its legal personality from the state. Far from being a “convenient heuristic formula”, corporate legal personality attaching to the nexus or entity separate from shareholders and all other corporate participants is the defining characteristic of the modern company. Keywords: corporate law; corporate governance; legal personality Suggested Citation: Suggested Citation Watson, Susan Mary, The Corporate Legal Person (January 12, 2018). Journal of Corporate Law Studies, January 2018 , Available at SSRN: https://ssrn.com/abstract=3300383
separate-legal-entity-representation The term “separate legal entity” is a fundamental concept in law that underlies business law and legal liability. Not getting it right means that you could: And it’s all avoidable. Unless you're already a lawyer you might want to read on, because they're some things that you may not know, that may make a difference to your business and what you do next.
building-block-entities A separate legal entity is a person recognised by law - a "legal person". The entity has its own legal rights and obligations, separate to those running and/or owning the entity. That person could be a company, limited liability partnership, or any other entity recognised by law as having its own separate legal existence. An “incorporated” entity - such as a company - is a
separate legal entity. That’s a separate legal existence to its: In HL Bolton Engineering Co Ltd v TJ Graham Sons Ltd 1957 1 QB 159, Denning LJ described companies like this:
human-body-parts A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere [employees] and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others
are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such. The law takes a flexible approach to recognising separate legal entities. Telling the difference when it will - and when it won't - can matter.
legal-entity The hallmarks of a separate legal entity are that it can: As a consequence of these features, separate legal entities can: All the things that human beings can do (and are legal entities), from a legal perspective. This terms “separate legal entity” means
the same thing as “separate legal personality”, “separate legal existence”, and “separate legal person”. It’s an entity with the features described in bold above and recognised by law as having those features. It’s this separate legal personality that makes companies attractive vehicles for business ventures. Sometimes, to identify what a legal entity is, it's more important to know when it's definitely not a separate legal person. That's next.
misunderstanding-legal-persons Although it may seem like it, a separate legal entity is not: It depends upon what is meant by use of the term "business". There is a consequence of all this. If you see an email using a particular domain name, it could be used so as to designate
one or more legal entities within a group of companies. It becomes a question of law decided on the facts of the case which separate legal entity on whose behalf the email was sent. Same with letters, and any other communication.
change-legal-person-name Here's a common trap. Does that change who we are from a legal perspective? Are we no longer legally bound with one another under the contract, because we changed our names? Well, no. We're the same people. And so it
is with say, companies. When they're formed, private limited companies ("Limited" or "Ltd" suffix), public companies ("plc" suffix) and limited liability companies ("LLC" suffix) are assigned a company number. That company number never changes. Ever. However, the company's name could be changed many times throughout its period of existence, and even during its liquidation or administration. Those changes of name don't change the legal identity or existence of
the company. Only its name. It stands to reason therefore, that the only reliable way to identify a company is by checking its company number.
importance-of-legal-entities Two main reasons. There are many others. Liability rests with the company, rather than the shareholders, directors or company officers. Also, other legal concepts in law are based on this separate entity concept. That includes these legal concepts:
They all pretty much start with the concept of separate legal entities. Top of the list for most businesses is to take advantage of limited liability. Business activities can be structured using different legal entities, as subsidiaries or connected companies. Each of the shareholders in each of those entities has limited liability when they're incorporated. The basic concept is straightforward. But in motion, things can get confusing if you don't know what you should be looking for. Why have a separate legal entity?why-have-separate-person Primarily, businesses trade as companies. The company - which is a separate legal entity - insulates the individuals participating in the business from personal liability which may arise as a result of doing business. In this way, the company:
The business owners and directors are protected from liability other than in limited circumstances (which essentially involve some sort of fraudulent conduct). The insulation of shareholders and liability usually top the reasons why consider it important. Joint Venturesjoint-ventures Joint venture companies are a common tool to enable distinct projects, separately from existing companies. Two or more independent businesses (ie: separate legal persons) may wish to cooperate to start a special project. Joint venture companies are often referred to as "special purpose vehicles", as they have a specific purpose for formation they:
Subsidiary Companiessubsidiary-companies Some businesses operate as groups of companies - one parent company, with many subsidiaries which in turn have their own subsidiaries. Subsidiary companies might be setup below a parent company for a variety of reasons:
Whatever the reasons may be, subsidiaries also attract all the benefits of other separate legal entities – insulation of personal liability of the people that run them, work for them, and own them. So this separate legal entity concept can be applied to obtain advantages in a number of different ways:
And there are others. Also, parent companies are not liable for the debts of subsidiaries companies. The subsidiary is liable for its own debts. That's usually the case. But if there has been series mismanagement of the subsidiary - the sort that attracts legal liability, such as sham companies - the parent company can be made liable for the debts of its subsidiary. Different Types of Companiestypes-companies In the UK, you have:
Is a partnership a separate legal entity?The word "partnership" is often used in the business context which isn't the same as in the legal sense. We're talking about a partnership under the Partnership Act here. Under the Partnership Act, English law deems business relationships that meet a particular description to be a partnership. When the defined description of partnerships is satisfied, a partnership is deemed to exist automatically. A partnership:
So the short answer is "no": a partnership (in the legal sense) is not a separate legal entity. That's because it's not an incorporated legal entity. Companies are just as susceptible to becoming partners in a partnership as well. It most often happens when joint venture agreements aren't set up properly or are administered in a way that falls into the definition of a partnership under the Partnership Act. All of the participants in the partnership maintain their separate legal identity and are jointly and severally liable for contracts which one of the members of the partnership signs up to. That's one of the reasons partnership and agency clauses are used in contracts. Foreign Separate Legal Entitiesforeign-legal-entity English law also recognises legal entities which are accepted as legal entities in their country of formation. In Bumper Development Corp Ltd v Commissioner of Police of the Metropolis [1991] 4 All ER 638, the UK Court of Appeal held that a Hindu temple was a separate legal entity. It had legal personality under the law of the state where it was created, India. In the US, an LLC (a limited liability company) is a separate legal person and entity, in the same way as an English PLC, limited company or limited liability partnership. Is a trust a legal entity?trust-deed-legal-person Well, yes and no. We think it depends on how it is set up:
Example: Separate Legal Entityhercules When a company is formed it becomes a legal entity in its own right. That formation is known as “incorporation”. The company has its own “legal personality”:
This legal separation means that the legal liability of the company is not the liability of:
Companies have perpetual existence, subject to ongoing filing formalities to keep the company on the register of companies in the place it was formed. Its legal existence survives the existence or participation of any directors and shareholders. That perpetuity of existence is a trait of the entity itself. The company’s existence ends when it is wound up and dissolved. The documents which establish the company set up the legal relationship between the shareholders and the directors is known as its “internal constitution”. It governs the legal relationship between the company, its directors and the shareholders. The internal constitution won’t affect the continued legal existence of the company as a separate legal entity. Origin of Separate Legal Entitiessalomon-origin This separate legal personality concept was first recognised by courts in case law in the famous case named Salomon v A Salomon & Co Ltd, decided in 1897. In that case the House of Lords decided:
The Supreme Court affirmed the fundamental importance and authority of the principles in Salomon v Salomon in Prest v Petrodel Resources Ltd (2013). What happened in Salomon v A Salomon and Co Ltd?skeleton-examination The facts of the case are more complicated than we’d like for example purposes. Stripping back a lot of the detail (and glossing over a lot of it), this is what happened in Salomon v A Salomon:
As a result, the company was liable on the contract sued on, and not the shareholders or directors. That’s the essence of a company’s own separate legal existence. The directors aren’t the company. Nor are the shareholders. Nor are the employees. Difference between Sole Proprietors and Companiesdifference-companies-sole-proprietor In this example, we use a company as a separate legal entity. It could be any other form of entity with a separate legal existence. Trading as a sole proprietorWhen someone trades as an individual, they’re a “sole proprietor” or a "sole trader”. Here are some assumed facts in a simple example:
Bob signs all of the contracts, insurance contracts, contracts with customers and suppliers in his own name. Bob “is” the business.
Bob’s liability in all of these situations is unlimited: all of his personal assets are at stake to pay taxes, the fine, damages for breach of contract, and the employee’s mistake. It’s different if Bob forms a company and trades as a company, as was the case with Mr Salomon, above. Trading as a Company:tablet The company will have its own separate legal identity to Bob. Like so…
What are the consequences of setting up the business for Bob? It’s the company Bob Roberts Limited that is liable:
and not Bob. Trading Names & Business NamesA trading name or business name is a name used by a business which is not its real name. It’s an alias for the legal entity. It’s analogous to a nickname for a natural person. A few examples:
These companies became known and famous by their trading names, rather than by their formal company name. Who wants to use the full company name anyway? Answer: When it gives rise to legal consequences if you don't. Why use a Trading Name?trading-name-analysis Different companies adopt trading names for different reasons, the usual ones are:
Rare is the occasion when companies apply for registered trade mark protection for the full company name. However, it’s the company itself that owns the goodwill in the trading name or the registered trade mark. The trading name can’t own property because it’s not a legal entity. But when it comes to legal relationships – such as signing contracts or filing documents with regulatory authorities, these companies have to use their proper legal name – with the “Limited”, “Inc” or whatever the appropriate suffix for the company is. We run through an example on how to sign contract below and show the difference. Implications in Lawhoops-in-law There are a series of recurring problems which are easily avoided. A few careful steps here and there and you should remain in the clear, and avoid personal liability and other problems. Properly identifying the legal entityThere is no substitute for doing a company search to locate the legal entity on the relevant register of companies. Companies, LLPs and other incorporated legal entities are formed when the UK Registrar of Companies (trading as "Companies House") says so here. Doing a company search quickly and easily removes any doubt about:
It also shows the status of the company. If the company is not listed on the Register, it doesn't exist. That means the company can't enter into any contract - again, because it doesn't exist as a separate legal entity. Seem obvious? Well yes, but... Contracts signed before a Company is formedSometimes business people sign contracts before companies are formed in anticipation of the company being formed. Contracts signed in the name of the company can't be enforceable against the company, because it didn't exist at the time. Just because the company comes into existence at a later date, after the contract was signed doesn't validate the contract. Also, if the company has ceased to exist - ie dissolved - or is in liquidation, the Companies Register will show that. If a company is dissolved, it has ceased to exist. Again, it can’t enter into contracts with others after it has ceased to exist. The contract might be enforceable however against the individual signing it. Contracting parties: Who am I contracting with?Back when companies were first made available over 100 years ago, incorporated companies were required to use the suffix “Limited” or the alternative “Ltd”. This was so that customers and suppliers knew that they were dealing with a company that had limited liability. That requirement still applies today, undiminished. The name of a company must end with the suffix "Limited", "Ltd.", "P.l.c.", as the case may be. "LLP" applies to limited liability partnerships. You might think that that's just for the purposes of registering the company. But it goes further. When it is a company trading, company suffix “Limited” or its permitted abbreviation, “Ltd” must be used. Using our example above, “Bob Roberts” and “Bob Roberts Limited” are completely different legal entities. So when a natural person signs a contract in their own name – and not that of the company – they become personally liable on the contract. personal-liability Suppose then that you run a business online. You have a website. But you do not:
The question is, what is the legal entity that hosts or owns the website? Who "is" the business? Without reference to the full name of the company, it can't be the company that's trading. When do you use the full company name?gas-light If you’re trading as a company, you can’t leave out the reference to the “Limited” or “Ltd”. The company is legally required to identify itself properly. Also, leaving out the full name of the company can lead to personal liability on the contract. Also, the UK Companies Act requires companies to use its proper company name, registered company number, and registered address on all paperwork of the company. This includes on:
Not doing so means the directors and employees expose themselves to the risk that they will be found to be trading as individuals, particularly when email is used to enter into contracts with customers and suppliers. Don't take my word for it. A specific piece of legislation says so. Once you start using a company, it’s important to use the company name, in the form appears on the Register of Companies, and observe the requirements for execution of contracts and other documents to create legally binding contracts. What if you don't use the company name when you should?legal-consequence There's a (very) good argument that it's not the company trading. It is someone other than the company that is trading. If that's a director of the company, it's an express route past limited liability otherwise available to directors and shareholders of companies. That's because it's not the company in the legal relationship. It's probably the individuals organising the business activity. Company vs ShareholderYou may need to sign a contract as a shareholder of a company. In those cases, you'd sign in your own personal name. It's important to get the signing provisions correct. FAQs: Separate Legal Entitiesfaqs-companies 1. What are “divisions” of a legal entity?Sometimes you might see wording such as “[Division Name], a division of [Legal Entity Name]”. What does this mean? Sometimes it means that “[Division name]” is a reference to a business unit within “[Legal Entity Name]”. So the division equates to a business name for the [Legal Entity Name]. Other times “division” can mean a reference to one or more legal entities. It’s really anyone’s guess – you need to make enquiries to find out for sure. You’d do that in part by doing company searches to find out information on the true name of the business that is trading and holdings itself out as a “Division”. 2. What are "branches" of a separate legal entity?Many businesses have many branches or multiple offices, at separate physical addresses. There's usually nothing in principle preventing a business from incorporating a subsidiary of the parent company for each branch, and each branch being owned by a single subsidiary. Take the banking industry. It’s highly regulated. UK banks are required to be owned by the legal entity which is regulated by the Financial Services Authority. A single bank might have dozens or 100s of branches. As a result of the regulations governing the banking industry, banks are not able to form companies for each branch it may have – disregarding the administrative inefficiency of doing so. Each branch is usually a property owned by the regulated bank. They’re owned by the same legal entity, such as HSBC Bank UK PLC, Lloyds Bank plc, Barclays Bank UK plc. 3. Does changing the name of a company create a new separate legal entity?When a UK company is formed, it's assigned a company number. It's a registration number which uniquely identifies the company . That registration number never changes. It's a permanent unique identifier for that company. The company name however, can change. All it takes is a resolution of the board of the company. That does not change the legal identity of the company. It doesn't create a new separate legal entity. It's the similar situation when an individual changes their name by deed poll. They are the same person. it does not change any legal relationships the person has with others. See for example this company. It has changed its name, but the company number did not change. It's the same legal entity. 4. Are there differences between accounting entities and legal entities?An "entity" for accounting purposes can mean different things. There’s room for confusion between an accounting entity and a legal entity. A legal entity or number of companies within a larger group can be grouped for accounting purposes in whatever way suits the companies, provided it complies with applicable regulatory requirements. Likewise, a single company can be broken up into any number of accounting entities to track the profitability of different business units within it. Conclusionsconclusions All of this may seem a bit basic. It is. But when it's in motion, it can be difficult to spot. We've seen judges enter judgment against individuals for signing contracts in their own name, rather than in the name of a separate legal entity. Without much discussion. That's because the law is so crystal clear. It's so easy to make a mistake a cause serious down the road. And even trainee solicitors have been known to not have a clear understanding of legal entities and how they're properly identified. Don't make the same mistakes as others before you. ProcessAdopting a process to identify separate legal entities and the capacity in which you may need to sign a contract is a formula for success. If you don't have a clear understanding of "the why" you are about to sign a contract in a particular way, you shouldn't. You may not need to speak to a lawyer, but you need to speak to someone to talk it through to get that clear understanding. Don't make the mistake of signing a business contract:
And use the "Limited", "Ltd" or "Plc" to identify the company as a company. Our Business Solicitorsbusiness-solicitors-london We're long serving business solicitors that have advised companies and individuals avoid problems such as those referred to above, often at the last minute. We've also helped companies pull themselves out of a bad spot after it would seem to be too late. We advise small and medium-sized businesses on:
For business legal advice, call us on +44 20 7036 9282 to speak with a business solicitor, or email us at . Why is it important to have a legal business?Legalizing your business shows your clients and potential investors that you're serious about your business venture, and that you're in it for the long haul. Also, all other things being equal, it's easier for a legally established business to gain clients and grow than it is for an individual.
What does it mean to say that a corporation is a legal person?Under the law, corporations possess many of the same rights and responsibilities as individuals. They can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. Some refer to a corporation as a "legal person."
Is a company regarded as a person?It can also sue and be sued and held liable under both civil and criminal law. As well, because the corporation is legally considered the "person", individual shareholders are not legally responsible for the corporation's debts and damages beyond their investment in the corporation.
How a company acquires a legal personality?The company acquires legal personality from the moment of the fulfillment of all formalities established by law. Thus according to the law for "carrying out acts of individuals and legal trade can be associated and companies with the legal provisions.
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