Concept Of Limited Liability In Corporations

Corporation is a separate legal entity

Conduct secondary research and write an essay to discuss the following topic: A corporation is a separate legal entity. With regard to corporations, explain the concept of limited liability.

In present day’s legal phenomena there are two kinds of persons first one is natural person and the second one is juristic person or artificial person. Actual person refers human beings and artificial person means those persons whose are not living in that sense like human beings but who have legal entity in eyes of the law. Previously only human beings are considered as individuals in the eyes of the law but in many cases and observation it has been recognized that there are another kind of entity which should have legal enforceability in the eyes of the law, these entity is corporations (Llrx.com, 2007). In this purview the legal entity of the corporations does not mean the same as it is considered in the case of natural persons, but here legal entity signifies certain rights and obligations of the entity. A Corporation has the rights and obligations which are essential for the purpose of recognition of an entity. A corporation takes its birth when it is incorporated as per the prescribed provisions of the law. Juristic person is a non living entity but it possesses personhood which has been recognized by the law (Anon, 2001).  

From the middle of 19th century, legal entity of corporations have become progressively more notorious, because the courts have increased the other rights of the corporations ahead of those which are essential to ensure their legal responsibility for debts (Study, 2015). Many commentators argue in respect of the corporation’s personhood, which is not a fiction to any further extent. It merely means that for quite a number of legal purposes, "person" acquired a larger significance than it was in non-legal matters (Mitchell, 2011).  

In the case of Louisville, C. & C.R. Co. v. Letson, (1844), the Supreme Court of United States held that for the case at hand, a corporation is "competent of being treated as a separate legal entity, as much as a natural person."  After Ten years, they reaffirmed the consequence of Letson, despite the fact that, to some extent dissimilar theory that "those who utilize the name of the corporation and work out on the faculties conferred by it," should be assumed decisively to be citizens of the corporation's State of amalgamation (Dine and Koutsias, 2007). In the case of Marshall v. Baltimore (1854), the concept of corporation’s separate legal entity have been codified by statutory laws, as the jurisdictional statutes of United States particularly deal with the domicile of corporations (Adams, 2002).   

1. A corporation has the following rights and obligations:

2. A corporation can sue or can be sued.

3. A corporation can enter into a valid contract.

4. A corporation can acquire and dispose of properties.

5. A corporation may or may not be stopped after the death of the directors, as they shall be replaced by others.

Rights and obligations of Corporations

6. A corporation is considered as a separate legal entity but it cannot be considered as a voter, for that reason a corporation cannot participate in the voting procedure like natural persons (Weiss and Weiss, 2000).

Laws relating to the company matters have recently been a topic of some interest to the Australian community (Alsop, 2004). The collapse of a figure of big enterprises as well as the teetering on the edge of insolvency of others has raised the question in relation to the competency of the authoritarian structures under which these enterprises conducts its operations (Baringer, 2008). This communal disaster of self-assurance in Australian companies as well as legislation of securities has been put together by what has seemed to be an increasing occurrence of practices like "insider trading" in the middle of the business group of people (Reuting, 2011). It may go so far as to recommend that it is in the middle of a "moral panic" in relation to the principles of the commerce community; a "moral panic" in which organizations and law of securities has been caught up because of its incapability to curtail the surge of illegal behavior (Morse, 2002).      

Repeated illustrations of the breakdown of business practices and commercial ethics to keep alive the expectations of public in general, together with a increasing awareness that commercial legislation and the agencies relating to the administration charged with the enforceability, has failed to check effectively the misconducts, that led to a requirement to seem anew at most of the nucleus doctrines of company law (Sargent and Schwidetzky, 2007). A probable solution to solve few of the theoretical and sensible troubles which overwhelmed the laws relating to company matters and the agencies are also charged with the enforceability may recline in some of the aspects of the history of the legislations relating to company affairs and its administration process throughout the territory of the nation (Young and Young, 2006). That historical examination might, for example, agree to decide if there are any methodical factors that may obstruct the effectiveness of accessible company law as a dictatorial mechanism.

In every company there is a norm relating to the liabilities of the company. In most of the cases the liabilities of the companies are limited to a certain extend. Generally, the names which are specified in the memorandum of association of the company are empowered to run the business of the company as well as the conducts of the organization. Liabilities of the companies lie upon the conducts of the organization and the income expenditure ratio of the organization. Liabilities of the company restricted to the directors, as the directors of the company are liable for the conducts of the organization. The concept of limited liability, strengthen not only the financial structure of the organization but it also helps to enhance the financial stability of the entrepreneurship. Limitation as to the liabilities of the company promotes business entrepreneurship in the capital market. It determines the duties of the directors of the company towards the right of the shareholders of the company. Limitation as to the liability of a company is determined by the number shares of the company issued to the respective shareholders. Each share holds some liability in relation to the financial condition of the organization. Restriction as to the liability of the company depends upon the number of shares a shareholder have, to that extend such a share holder is liable. Limitation of the liabilities as to the shares helps the company for enhancing the share capital.

Limited liability of Corporation

When a company is authorized to earn unlimited amount of profit then that company should be liable in the same manner. Limitation as to the liability depending upon the shares of the company puts burden to the directors of the organization. It restricts the share capital to the number of shares issued; further introduction of shares in the market is subject to prior approval by the competent authority. The concept of limited liability of the companies is very much rigid in nature, this cannot be changed in urgent situation, and the flexibility level of this concept is also in question.  For long term aspirations, limitation as to the liability of a company creates burden for achieving its goals and objects, as limitation of liability also makes limitations for capital shares. In respect of taxation of an organization it makes things difficult for the organization and because of this ambiguity may also arise.

The principle of Uplift the corporate veil varies from one country to another country. In the outlook of two commercial law scholars, it seems that, there is a common accord that the entire area of restricted liability, and equally of piercing the corporate mask, is among the most ambiguous in corporate law (Presser, 2005). When any dispute in relation to company matters comes before the Ld. Court, then the court may, for the purpose of resolving the dispute, uplift the corporate veil of that company. Corporate veil means an intangible veil which hides the internal matters of the company. All the issues which are to be kept within the limits of the company as a secret are kept behind the corporate veil. This veil is never lifted unless the court of competent jurisdiction gives order to lift the veil (Ricks, 2003). The court does not lift any veil in actual, the court gives order to disclose the internal factors of the company with the court with necessary documents which are relevant for that purpose (Vanderkerckhove, 2007).  

In the of The King v Portus; ex parte Federated Clerks Union of Australia, Latham CJ whilst deciding whether or not workers of a corporation governed by the Federal Government were not working by the Federal Government ruled that:

"The company…is a distinct person from its shareholders. The shareholders are not liable to creditors for the debts of the company. The shareholders do not own the property of the company" (The King v Portus)

In the case of Pioneer Concrete Services Ltd v Yelnah Pty Ltd, the definition of the expression "lifting the corporate veil" has been given by the court. The court said; "That although whenever each individual company is formed a separate legal personality is created, courts will on occasions, look behind the legal personality to the real controllers."  (Pioneer Concrete Services Ltd v Yelnah Pty Ltd).

References

Adams, M. (2002). Essential corporate law. Sydney: Cavendish Pub. (Australia).

Alsop, R. (2004). The 18 immutable laws of corporate reputation. New York: Free Press.

Anon, (2001). [online] Available at: https://law.unimelb.edu.au/files/dmfile/Piercing_the_Corporate_Veil1.pdf [Accessed 25 Feb. 2015].

Baringer, D. (2008). Limited liability companies. Eau Claire, Wis.: National Business Institute.

Dine, J. and Koutsias, M. (2007). Company law. Basingstoke: Palgrave Macmillan.

Llrx.com, (2007). The Veil Doctrine in Company Law | LLRX.com. [online] Available at: https://www.llrx.com/features/veildoctrine.htm [Accessed 25 Feb. 2015].

Mitchell, R. (2011). Law, corporate governance and partnerships at work. Farnham, Surrey, England: Ashgate Pub.

Morse, G. (2002). Palmer's limited liability partnership law. London: Sweet & Maxwell.

Pioneer Concrete Services Ltd v Yelnah Pty Ltd.

Presser, S. (2005). Piercing the corporate veil. [Eagan, MN]: Thomson/West.

Presser, S. (2005). Piercing the corporate veil. [Eagan, MN]: Thomson/West.

Reuting, J. (2011). Limited liability companies for dummies. Hoboken, NJ: Wiley Pub.

Ricks, R. (2003). The corporate veil. Atlanta: Longstreet Press.

Sargent, M. and Schwidetzky, W. (2007). Limited liability company handbook. St. Paul, MN: Thomson/West.

Study, T. (2015). The Doctrine of Limited Liability and the Piercing of the Corporate Veil in the Light of Fraud: A Critical Multi-Jurisdictional Study. [online] Academia.edu. Available at: https://www.academia.edu/4950021/The_Doctrine_of_Limited_Liability_and_the_Piercing_of_the_Corporate_Veil_in_the_Light_of_Fraud_A_Critical_Multi-Jurisdictional_Study [Accessed 25 Feb. 2015].

The King v Portus.

Vanderkerckhove, K. (2007). Piercing the corporate veil. Alphen aan den Rijn, the Netherlands: Kluwer Law International.

Weiss, D. and Weiss, D. (2000). Fair, square & legal. New York: AMACOM, American Management Association.

Young, S. and Young, S. (2006). Limited liability partnerships handbook. Haywards Heath, West Sussex: Tottel.