A legal entity that is formed by an individual or a group of individuals who are its shareholders is referred to as a corporation. A corporation is a legally separate body from its employees, directors and shareholders. Incorporation is advantageous to businesses in that, it shields their shareholders from liabilities as a result of its business operations (Furmston, 2007). A corporation as a legal entity can carry out business activities; enter into a contract with an individual, group of individuals or with business organizations. It can also be sued or sued, without its shareholders being affected.
The key advantage to incorporation is the principle of limited liability. This shields its employees, directors and shareholders from liabilities the business suffers while conducting its business functions. A corporation is thus a separate entity and limits the responsibility of its owners and their personal properties. Solomon versus Solomon (1897) AC 22 is a historical case in relation to incorporation law. The decision, in this case, shed more light on the relationship between a corporation and its owners.
In this case, it is clearly revealed that the basic thought to become acquainted with when starting a business organization is the concept that the business entity has a legal persona in its own right (Mancuso, 1996). This is especially when the business entity assumes the form of a Corporation. This is to say that, if an individual or a group of individuals starts a business as a corporation, then the company takes the form of a legal entity with a different legal persona, separate from those who created it or its shareholders. Legally incorporation is different from its workers, directors and owners.
The case of Salomon v Salomon & Co Ltd, tells us one simple thing about incorporation, that in eyes of laws a corporation is a separate legal person, which is distinct from its owners and directors. In this case, Aaron Salomon a merchant who was residing in Victoria in England started a limited liability company with a minimum of seven shareholders (his wife and children). Solomon as a secured creditor gave a loan to the company and borrowed more from the company. In the eyes of law, the issue was who should be compensated first, that is whether it is the company’s workers and firm’s debts (unsecured creditors) or Solomon who was a secured creditor. The England court of appeal decided that Mr. Solomon was a liar and his firm was a con. However, the court of the house of lord maintained that the company was an asset created and thus there was no cheating, and therefore Mr. Solomon was a separate entity distinct in relation to the company. This decision has been used in a number of cases from that time (Borofsky, 1998).
Ever since, Solomon versus Solomon (1897) AC 22, corporations have been legally taken as independent entities separate from their workers, directors and their owners. Only in special cases whereby this principle of limited liability does not apply. For instance, where it has been held permissible to remove the corporate cover e.g. where the firm in question, is a mere façade, workers acting as such will be answerable to tortuous acts in the course of their employment (Handmaker, 1997).
From the above case, we see how incorporation is beneficial to businesses as it allows businesses to enter into business transactions, conduct operations and hold assets. Incorporation also allows the companies to exist regardless of changes in those created them as well as their stakeholders (Furmston, 2007). The law has clearly stated that the separation of a limited liability company with its stakeholders should be strictly adhered to.
The case of lee versus lee air farming (1961) AC 12 is also an important decision that gives us some insight into the relationship between a limited liability company and its employees, directors and owners. In this case, it is clearly seen that a limited liability company does not function as the representative of the stakeholders. In other words, the owners of a limited liability company do not incur liabilities arising from the business activities of the company or its workers. But it should be noted that directors can incur personal if they direct the company or its employees to commit an offense (Friedman, 1995).
Currently, most corporations are characterized by the principle of limited liability of their shareholders. This may not be an essential attribute of a commercial company. Clearly, even for a duration time after the enactment of the Limited Liability Act of 1855, there were a number of limited liability companies whose shareholders incurred losses as a result of their companies’ debts.
By minimizing and identifying the likely risks to shareholders, incorporation opens the door for today’s businesses to raise the needed finances for their operations. Only in some cases does the law pierce the corporation veil and fix the owners with personal liability as it was seen in the Salomon v Salomon & Co Ltd (1897) AC 22.
Incorporation makes it easier for companies to transfer ownership. A corporation is a legally separate entity and therefore its ownership can change without interfering with its business activities. For instance, if a shareowner sells his or her shares, a limited liability company continues its business activities with the new owner who has bought the shares. Centralized management incorporation is also very beneficial
In most cases, the challenge to incorporation is the finances need to incorporate. The corporation pays huge taxes to the government. More so, a Corporation has a lot of paperwork in dealing with records and reports.
Reference list
Borofsky, J.Converting a Corporation to an LLC. New York: CPA journal. 1998 Furmston, M. 15th ed. Cheshire, Fifoot & Furmston’s Law of Contract. Oxford: Oxford University Press. 2007
Friedman, S. How to Profit by Forming Your Own Limited Liability Company. Washington: Upstart press. 1995
Handmaker, S. Choosing a Legal Structure for Your Business. London: Prentice Hall.1997
Mancuso, A. Form Your Own Limited Liability Company. Berkeley: Nolo Press. 1996