Incorporation Definition


Information contained within this essay does not constitute legal advice or guidance and is intended for educational purposes only. Dana Griffin has written for a number of guides, trade and travel periodicals since 1999. CONSEQUENCES OF INCORPORATION Separate Legal Personality Griffin is a CPR/first-aid instructor trainer for the American Red Cross, owns a business and continues to write for publications. She received a Bachelor of Arts in English composition from Vanguard University.

In the one hand the company exclusively entitled to exercise its rights as human beings, on the other hand, it is limited. In fact, a company is not entitled to be compensated for aggravated damage for injury to feelings, because the company does not have “feelings to be injured”, as stated in Collins Stewart Ltd v Financial Time Ltd. The power to make contracts is delegated to human agents working for the company. This refers to the existence of any organization despite the death, bankruptcy, insanity, change in membership of any member from the business.

How Incorporation Works

When there is no entity separate from members, the court will pierce the corporate veil and take action. After that the court will make the company and its members liable for any breach of contract. In a corporation, the assets and cash flows of the business entity are kept separate from those of the owners and investors, which is called limited liability. The Courts may pierce the corporate veil and remove the protection of the Salomon principle to prohibit fraud. This was evident in Gilford Motor Co Ltd v Horne where a managing director agreed not to engage with his former employer’s customers but proceeded to do so through a newly formed company. The courts pierced the corporate veil to reveal the sham transactions occurring behind the façade of the company.

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As we observed with the Salomon, Lee and Macaura cases, the consequences of treating the company as a separate legal entity or not can be extreme. Over time the judiciary have swung from strictly applying the Salomon principle in these difficult situations to taking a more interventionist approach to try to achieve justice in a particular situation.

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It has perpetual succession or existence regardless of any changes that may take place in the membership as a result of death, retirement or any other reason whatsoever. Therefore, while the death of any individual businessman may put an end to his business and the death of a partner may automatically dissolve the partnership, incorporation ensures continuity of the business of the company.


These measures are available under the Company Act 2006, Insolvency Act 1986 and Company Director Disqualification Act 1986, which are described hereinafter. In particular it knows the corporation, and for a multitude of purposes it treats the corporation very much as it treats the man. In Act II, Scene 1 of Gilbert and Sullivan’s 1889 opera, The Gondoliers, Giuseppe Palmieri requests that he and his brother be also recognized individually so that they might each receive individual portions of food as they have «two independent appetites». He is, however, turned down by the Court because the joint rule «… is a legal person, and legal person are solemn things.» In Jones v Lipman, Mr Lipman had entered into a contract with Mr Jones for the sale of land. Mr Lipman then changed his mind and did not want to complete the sale. He formed a company in order to avoid the transaction and conveyed the land to it instead.

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When you finalize the paperwork, the deed to the property is under the business’s name. This disclaimer informs readers that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual. Fraudulent Conduct (Sec. 339)- In the case where the company is winding up but still is does business with an intention of doing fraud. There would be many agreements which would be made wrongfully if a company is a part of group of companies.

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So the organization has the Legally binding limit and it can go into the agreement with any individual even with its own workers and investors. Statutory Provision– There is certain sections which make members personally liable i.e. the corporate veil is lifted after the applicability of the Section. They followed the rules which said that the creditor should be paid first. The court in their judgment said that the company is distinct and completely different from that of the person who runs it. The judgment favored Mr. Salomon and applied the Doctrine of Separate Legal Entity that Mr. Salomon and the company Salomon and Co. The unsecured creditors claimed in the court that Mr. Salomon should not be paid first as he and the company is the same. The company does not have any different Legal existence from Mr. Salomon.

Functions of Separate Legal Existence

Members generally cannot do this on their company’s behalf although a company may sue and be sued by its own members. Mainly seen when companies are formed for non-commercial purposes, such as clubs or charities.

What is meant by a corporation’s having a separate legal identity?

A corporation has separate legal personality in the sense that it is a legal person separate and distinct from its shareholders, directors and officers. A corporation may enter into contracts and own property in the same manner as a natural person. The corporation may also sue and be sued in its own name.

The Court may also order forfeiture/attachment of the properties acquired by the illegal and corrupt means by the real men behind the corporate as also the properties of their family members. Therefore, the concept of the lifting of corporate veil is also as necessary the concept of Separate Legal Entity. There are circumstances where the concept of a distinct body can be regarded as arbitrary and the courts can, on various grounds, take judgments opposing the concept of SeparateLegal Entity. The court also takes judgments opposed to the concept of Separate Legal Entityin order to meet the individualbehind the veil and to expose the true essence of the business.

This did not have the desired effect, and the company was placed in insolvent liquidation. The liquidator on behalf of the unsecured creditors alleged that the company was a mere “alias” or agent for Mr Salomon, and that Mr Salomon was therefore personally liable for the debt of the company. Your personal liability in the lawsuit is limited to the amount of your investment, 25%. Your partner carries 75% of the liability in the lawsuit and may have assets seized to pay for it. Or, your partner may need to use personal funds to cover the costs of the legal proceedings. Has observed that the Court will be justified in piercing the veil of incorporation in order to ascertain the true nature of the transaction as to who were the real parties to the sale and whether it was between husbands and wives behind the facade of separate entity of the company.


The company is able to own property in its own name and issue shares to raise capital. Besides, shareholders and directors cannot be considered as the agents or trustees of a company. Finally, a fundamental characteristic of corporate separate personality is that of perpetual succession, which results in a continuation of the company’s existence regardless of its members. The fundamental attribute of corporate personality from which all the consequences flow is that the corporation is a legal entity distinct from its members. Hence, it is capable of enjoying rights and of being subject to duties which are not the same as those enjoyed or borne by its members.

Liability and Taxation

Beazley and Stein JJA held that it was reasonably foreseeable that there was a risk of injury to employees as a result of the work practices adopted by AP. Their Honours touched upon the interaction of corporate law and tort law pointing out that the imposition of a duty of care on CSR did ‘not do any violence’ to the principle in Salomon.

This section alludes to some key features of incorporation namely, corporate personality, perpetual succession and in some cases, Limited Liability. Other than that, in a corporate body, the shareholders of the company can enjoy limited liability.

Whether Company registered under the Companies Act have corporate personality…

In case Aspatra Sdn Bhd & Ors v Bumiputra Bank Malaysia Berhad , Lorrain Osman, one of the director of Aspatra Sdn Bhd, was once a director of Bumiputra Bank Malaysia Berhad, must account for the secret profit he made in breach the fiduciary duty. To avoid detection Lorrain Osman had channeled the monies which is the secret profit he make into several companies that he controlled, one is the Aspatra Sdn Bhd. BBMB feared that the money Lorrain Osman took would leave Malaysia and applied for an injunction. The veil lifted to reveal that the assets of Aspatra Sdn Bhd belong to the Lorrain Osman and the injunction was accepted. Under section 365, Companies Act 1965 provides that any payment of dividend not from profit is prohibited. Any payment made of dividends to shareholders is personally liable by the director towards the creditors of the company when there are no profits available.

  • That same structure allows you to entice new employees by offering them ownership of the company through either stocks or stock options.
  • The civil proceeding can be invoked by the liquidator or on the application by the creditor against the directors, under the section 214 of the Insolvency Act 1986, during the liquidation proceeding.
  • In an unincorporated society, the property of the association is the joint property of its members.
  • According to the section 304, Companies Act 1965, together with the section 303, provide that an officers who knowingly contract a debts on behalf of the company.
  • As a consequence, each of them owns rights and obligations on their own.