In our Back to Basics series, our new apprentice, Joseph McDaid will be explaining the fundamental principles of corporate and tax services from the perspective of someone completely new to the industry.
It is our hope that this short series which will delve into a fresh key topic each week, will provide others like Joe, who are starting out in the industry, with bite size, easy to digest information to save, study and explore as they continue to expand their knowledge of corporate and tax services.
This week Joe explores the concept of a company and its key fundamental features.
What is a company?
The term company has become synonymous with the place you work, who you do business with or any organisation that wants to sell you something. We use the words company, business, organisation, corporation (and many more) interchangeably without really knowing what they mean or the impact their legal definition could have.
So, what is a company? Simply, a company is a legal entity with its own rights, responsibilities and obligations which are separate from both the people who own it and the people who run it. The modern company developed in the mid-19th century to develop two key features: separate legal personality and limited liability. These features have been so successful that there have been no fundamental changes to them in nearly 180 years.
What are two fundamental features of a company?
Separate legal personality
Separate legal personality means a company is a distinct autonomous legal person, separate to those who own it (shareholders) and run it (directors). A company has rights and liabilities in the same way a human does. With the company being its own entity, it is able to operate through an agent (often known as a director) who can act on the company’s behalf. The company can enter into contracts, purchase and own property, borrow money, and has the ability to sue or be sued by other parties.
Limited liability
Limited liability allows all debts and liabilities of the company to only belong to the company itself. The shareholders liability to the company is limited to the value of the shares they hold. The directors are also protected from being personally liable for the debts as they belong to the company rather than them. This means that should the company become insolvent, creditors are only able to make a claim against the company’s assets or finances, not the shareholders or directors personal wealth. This is important protection for entrepreneurs, innovators and investors as it provides security and stability if business misfortune happens.
Have the key features of a company been challenged?
While there have been many legal challenges to these features, the most famous is Salomon v Salomon.
What happened?
In 1896, Mr. Aron Salomon incorporated his boot-making business into a company – Salomon Ltd. The company faced financial difficulties and went into liquidation with insufficient cash to pay its creditors. Unsecured creditors claimed the company was a fraud and Mr. Salomon should be personally liable for the company debts.
Salomon Ltd was taken to court and, initially, the court found in favour of the unsecured creditor; the court stated the company Salomon Ltd was a fiction and Mr. Salomon should be personally liable for its debts. However, the case was appealed and eventually the House of Lords overturned the previous rulings stating that Salomon Ltd was a separate legal entity and therefore the liability to pay the debts of its creditors was limited to the company only.
Are there any exceptions?
Yes, in limited circumstances a court will look through the legal form of the company to its shareholders – this is known as piercing the corporate veil. There are some essential elements which must be established to do this:
- The company must have been party to misconduct;
- An individual (or individuals) must have exercised some control over the company; and
- The individual(s) must have intentionally used the company as a shield for their misconduct.
Stay tuned for next weeks discussion on Corporate Service Providers.
If you have any questions please don’t hesitate to get in touch with joseph@martynfiddler.com
In our Back to Basics series, our new apprentice, Joseph McDaid will be explaining the fundamental principles of corporate and tax services from the perspective of someone completely new to the industry.
