TITLE OF PROJECT

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Separate Legal Entity Of A Company

Submitted by

Shashank Diwakar
-----------------------------------------

B.COM L.L.B(Hons.) 5 th Semester

Roll No…48

Faculty of Law

Dr. Shakuntala Misra National Rehabilitation

University, Lucknow

In
November, 2017

Under the guidance of

Mr. Shail Shakya
(Faculty Of Law)

Designation Of Guide
Assistant Professor In Law
 ACKNOWLEDGEMENTS

I would like to express my special thanks of gratitude to my teacher Mr.

Shail Shakya who gave me the golden opportunity to do this wonderful
project on the topic Separate Legal Entity Of A Company, which also
helped me in doing a lot of Research and i came to know about so many new
things I am really thankful to them.
Secondly i would also like to thank my parents and friends who helped me a
lot in finalizing this project within the limited time frame.
 INTRODUCTION
The main aim of Law is to control the bond concerning individuals in the society. The authority
of the acts and omissions of persons is determined on the basis of their reasonableness. All those
acts which do not badly affect the interest of others are held to be legal whereas the acts which
interfere with the rights of others are called illegal. Therefore law imposes certain duties on
individuals for the protection of interest of manhood. Therefore rights and duties form the basis
of judging the legitimacy of mans act. The law imposes liability for unreasonable and unlawful
acts, the enforcement of which is confirmed through legal sanctions. The law being concerned
with regulating the human conduct the concept of legal sanctions. The law being concerned with
regulating the human conduct, the concept of legal personality establishes an important subject
matter of jurisprudence because there cannot be rights and duties without a person.

The separate legal entity concept, as it applied to large joint stock companies, evolved
throughout much of the nineteenth century, and in particular, during the period between 1840 and
1880. This evolution was gradual and involved subtle changes that occurred on a number of
fronts. Common law developments included the changing nature of shares and the refinement of
the internal relationships within a company which served to separate a company from its
shareholders and thereby differentiated companies from partnerships. At the same time,
companies adapted their capital structures and the ways in which they raised capital so as to
make themselves more attractive to investors. These practices also reflected the distinction drawn
by the investment sector between joint stock enterprises and partnerships. The separate legal
entity concept then, was largely developed by the late nineteenth century insofar as it applied to
joint stock companies.

This project work along with different theories of corporations also examines the well-known
case of Salomon v Salomon & Co Ltd and its effect on the evolution of the separate legal entity
concept. It is important to consider the role of Salomon’s case in this evolutionary process
because the legal principle derived from the case has been the legal basis of the subsequent
application of the separate legal entity concept to corporate groups. Salomon’s case is usually
regarded as a landmark case which finally established the fundamental principle that a company
is a separate legal entity distinct from its members. This core principle of company law has come
to be so closely associated with the case that it is widely known as ‗the principle in Salomon’s
case‘. According to this widely accepted narrative, Salomon’s case represented a belated but
inevitable advance of the law towards clarifying the separate nature of the relationship of
shareholders and their company and thereby better serving the needs of business by establishing
a more efficient company law that recognised the commercial expectations of the business
community.1

1 Thesis of nytimes last accessed on 28th march 2014.

 Oigin
The word “person” is derived from the latin word persona which meant a mask worn by actors
playing different roles in a drama. Until sixth century the word was used to denote the part
played by a man in life. Thereafter it began to be used in the sense of a living capable of having
rights and duties.

Generally there are two types of person which the law recognises namely natural and artificial.
The former refers to human beings while latter to other human beings which law recognised as
having duties and rights. One of the most recognised artificial person is a corporation. In the
opinion of many writers the word” personality” has been restricted to human beings because of
the sole reason that they only are subjected to rights and obligations, but in law the scope of
word “personality” is wide enough to cover gods, angels, idols, corporation etc. despite of the
fact that they are not human beings.

Conversely there may be living persons such as slaves who were not treated as person in law
because they were not capable of having rights and duties. Likewise, in Hindu ascetic who has
renounced the world ceases to have any proprietary rights and his entire estate is passed on to his
heirs and successors and his legal personality is completely lost.

Human beings are no doubt units of society and were in existence prior to evolution of both law
and society. Since laws were made by individuals and for them, jural relations between them
came to be recognised for legal purposes. Human beings as a legal person, therefore implies a
multitude of claims, duties liberties, liabilities etc.

However no sooner than later it was realised that treating only human beings as persons in law
would lead to good deal of needless perplexity, which could be avoided by conferring legal
personality on certain jural relations applicable to others than human beings for the purposes of
law.

Definition of legal person

Jurists have defined legal persons in different ways,

The German jurist Zitelmana considers “will” as the essence of the legal personality to quote
him “personality is the legal capacity of will, the bodylines of men for their personality a wholly
irrelevant attribute”
Salmond defines a person as “any being to whom the law regards as capable of rights and
duties. Any being that is so capable is a person whether human being or not and nothing that is
not so capable is a person even though he be a man”2

Gray defines “person” as entity to which rights and duties may be attributed” any being that is
capable of holding a right or duty, whether it being a human or not is person in law3.

According to Paton, legal personality is a medium through which some such units are created in
whom right can be vested.

Therefore persons in juristic terms are of two kinds: natural and legal .the former are human
beings while the latter may be real or imaginary, in whom law vests rights and imposes duties
and thus attributes personality by way of fiction.

A natural person is a living human being. But all human beings need not necessarily be
recognised as persons in law. For example slavery, before abolition of slavery the slaves were
considered to be devoid of any legal personality for they could not have any rights and duties.
Also persons such as children have restricted rights for they do not have right to vote.

Legal persons on the other hand is a person any subject –matter in which the law attributes legal
personality. Legal personality being the creation of law can be conferred on entities other than
human beings. As Salmond rightly observed that “law in creating legal persons always does so
by personifying some real things”. He further pointed out that all though all legal personality
involves personification the converse is not always true.4

Legal persons are therefore artificial beings to which law attributes personality by way of fiction
where it does not exist in fact. They are capable of rights and duties like natural persons.

Hibbert classified legal persons into three different categories:

 Certain non-living things can be conferred legal personality by personification. The

existence of such a legal person is real but its personification is fictitious.

 A collection of rights and duties may be vested in some real or imaginary beings to whom
personality is attributed by law.

 Fitzgerald, the learned editor of Salmond jurisprudence writes that legal persons being
the arbitrary creations of the law, may be of several kinds the English law however
recognises only a few kinds of legal persons .(1) corporations (2) institutions such as
trade unions and societies and associations, and (3) the estate of funds.

2 Fitzerland p.j.”salmond on jurisprudence (12th edition) p:299.

3 Dr n.v. paranjape “studies in jurisprudence legal theory,5th edition, central law agency.
4 Supra (1)
 The concept of separate legal entity

The principal effects of the formation of a company are twofold. First, its shareholders, and their
transferees, become members of an association and are granted rights as such. Pre-eminent
among these are, usually, powers of control in the widest sense of an entitlement to participate,
by voting, in the management of the company through the appointment and removal of its
directors, the distribution of profits and other decisions of the company in general meeting, and
also by the power to enforce the company’s regulation. Secondly, and consequently, the members
relinquish all proprietary and other interests in the monetary or other consideration which they
have given for their shares and which becomes wholly vested in the company. In effect,
therefore, the members’ rights of ownership of their assets are completely reconstituted and the
powers conferred by membership substituted for powers of direct this result is achieved by.

Applying to the company three basic principles or groups of principles. First, the legal capacity
of the company is restricted or limited in its extent, both by the objects of the company and, more
basically, by the common law, to activities which are both lawful and appropriate to the general
scope of its purposes. Secondly, within the scope of its particular objects the company is
accorded legal capacity for proprietary, contractual and other purposes which is of exactly the
same nature as that possessed by natural persons of full capacity. This capacity is entirely
separate from, and not derived from or related in any way to, the individuals who ultimately
comprise the company’s membership. Thirdly, the company itself is accorded full and
independent procedural capacity both vis-h-vis its members and outsiders. From the combination
of these principles flow all the well-known practical aspects of separate legal entity. For
example, due to its separate proprietary and other capacity the company may enjoy perpetual
existence, its usefulness as an entity for accounting purposes is given a legal foundation, and the
possibility is opened that its members may limit their liability.

Like the trust, the company enables the proprietary interests of natural persons to be associated
and reconstituted in a manner which makes possible a real division of the ownership and control
of property. Unlike the trust, however, the company may, to the extent it is empowered, itself
possess full and independent capacity to exercise contractual, proprietary and other rights.

Meaning of corporate personality

Corporate personality is a creation of law. Legal personality of law is recognised both in English
and Indian law. A corporation is an artificial person enjoying in law capacity to have rights and
duties and holding property. A corporation is distinguished by reference to different kinds of
things which the law selects for personification. The individuals forming the corpus of the
Corporations are of two kinds distinguished in English law as corporations aggregate and
corporations sole. According to coke persons are of two sorts, persons naturally created by god
and persons incorporate or politique by policy of man. A corporate aggregate is a group of co-
existing persons and a corporation sole is an incorporated series of successive persons. The
former is that which has several members at a time and the latter is that which has one member at
a time. Corporations are found only when the successive holders of some public office are
incorporated so as to constitute a single, permanent, and legal persons.5

Evolution of the notion of corporate personality

In mature systems of law the doctrine of corporate personality is fully developed and a clear –cut
distinction is made between the individual who compose a corporation and the corporation itself.
If we postulate that the company may have a distinct persona separate from that of is
shareholders or directors, it is difficult to attack the logic of this distinction. Whatever may be
said of its practical effect? Conversely the acts of two separate departments of a company are in
law the act of the same person.6

If a group of miners wish to co-operate to secure cheap delivery of coal from the colliery at
which they work, they must be careful as to the legal forms they use. if they create an
incorporated company to organise the transport a carriers licence must be secured, since the
company is carrying goods for hire or reward .but if they merely form an association then each
member is regarded as the part owner of the vehicles and the co-owners do not carry their own
goods for hire or reward merely because they contribute to the running expenses. The formation
of a company introduces a new legal persona which owns vehicles and receives money for coal
that does not belong to it.7

In modern law therefore there is a clear cut distinction between the personality of a company and
the personality of its members. The company may engage in juristic acts, sue, and be sued
.though all the members change overnight, indeed even if they all die the company remains the
same legal persona. But this conception of corporate personality is achieved but slowly.8

The first step to evolve is based on family, but no doctrine of group personality is necessary at
home the family retained a very strong organisation but no theoretical difficulty arose as its
powers were vested in human pater families. Religious and ecclesistical grouping provides
another unifying element and we also have the manifold agencies of government such as
government such as the counties, hundreds and boroughs of English law. Economic associations
such as the merchant guilds create another organisation of the community. But it is futile to
5 P.J.Fitzgerland, “Salmond on jurisprudence”,Ed. 12.universal law publishing co.pvt.ltd.pg 66
6 Harrods ltd v lemon (1931) K.B. 157
7 Warzel v hughton (1937) K.B. 380
8 G.W. PATON “A TEXTBOOK ON JURISPRUDENCE” Ed.4, Oxford University Press.
expect to find answers to problems phrased in modern language concerning corporate
personality, for they were not asked earlier by the lawyers. We have already seen that the state in
England reached a high degree of organisation on the very inadequate theory that the state was
the king and the king the corporation sole.9 Duff’s analysis on rule of Roman law reveals how
long the road to a fully developed conception of human personality is. Persona was not always
used in the sense of legal personality, and there are hundreds of passages where homo could be
substituted for persona without any apparent change in the sense. If we find lack of analysis
where the individual is concerned it is not surprising to say that “the republican lawyers did not
get beyond the first rudiments of that very abstract and artificial conception, corporate
personality”.

In the English law there were in thirteenth and fourteenth centuries numerous active groups of
whom some were dissolved into their component parts before they became corporations others
followed a gradual development to legal personality. When Bracton wrote the notion of corporate
personality .it not clearly understood and the evolution was comparatively slow. The inimitable
touch of Maitland has enlivened the story of the corporation sole and we see there the great
difficulty that exist in securing a clear distinction between the rights of natural man and the rights
of corporation sole which it represents. The corporation sole was a useful device for holding of
title to church land, but, although logic would require us to recognise that the artificial
corporation sole can survive the death of natural person, the medieval lawyers however thought
that the artificial corporation was in abeyance if the benefice was as vacant. A statute of
limitation speaks of a corporation sole or his predecessor.

Later in the fifteenth century it was felt that the corporation could not sue one of its members, for
this was really a case of a man suing himself. By the time coke, it was laid down that the
corporation could be created either by a common law, by authority of parliament, by royal
charter or by prescription –but there must be some lawful authority of incorporation there must
be. Corporation played a large part in development of British empire .as a result of which there
were 65000 registered companies in England, but within forty years the number increased to 3,
31,000.

In 1897 Salomon v Salomon & Co Ltd 10, a case concerning the legitimacy of limited liability of a
single beneficially owned company according to the companies legislation, created the concept
of the separate legal personality of a company. This idea, often described as a fundamental
principle of

Company Law by our judges, exists both as a powerful metaphor and a judicial reality The
interaction of these two aspects has in a sense caused the concept to assume a life of its own as a
persuasive metaphor which has dictated the course of law focussed around its fulfilment rather
than the specific regulative aims of the law in each discrete area. The principle’s application in so

9 G.W. PATON.,”A TEXTBOOK ON JURISPRUDENCE”,ED.4TH ,oxford university press.

10 [1897] AC 22 HL
many different situations each with utterly different consequences, indicate a sense in which the
courts have often merely mapped out the logical consequences of ‘separate legal personality’
with inadequate examinations as to its specific ramifications.

The concept of the corporation as a separate legal personality is, as Farrar describes “essentially
a metaphorical use of language, clothing the formal group with a single separate legal entity by
analogy with a natural person’] while obviously a fiction, the choice of metaphor or analogy is
not entirely arbitrary, and must respond to organisational realities of the corporation as well as
conforming with and making intelligible the treatment of organisations as legal actors, In this
sense the conception of a corporation is both analytical and ideological, descriptive and
prescriptive, It is not enough to dismiss the debate over the nature of corporate personality as
Dewey did in 1920 by emphasising that corporate rights and Liabilities were the product of the
law and that the legal implications or meanings of the corporation was “whatever the law makes
it mean”.11

The law’s conception that the “company is at law a different person” in some ways seems proper
and satisfying, as Dan-Cohen writes, °it at once provides a unifying familiar image of The
organisation and expresses those features in virtue of which treating the organisation as a legal
actor makes sense. The corporation as a complex organisation requiring regulation in many
different situations presents a special problem as Dan Cohen writes:

“The cognitive need for ’epistemic access’ thorough a Unifying metaphor is felt most urgently
with respect to organisations because of their ’ontological elusiveness’: hovering between the
abstract and the concrete, they evade our grasp by constantly invoking the opposing fears of
reductionism and Rectification.”

The metaphor of personality is useful in conceptually facilitating and describing many of the
corporation’s traditional and modem corporate attributes. The metaphor was used in Salomon to
express the fact that Salomon’s incorporation was legitimate according to legislation and
therefore he should be a11owed to benefit from limited liability. The creation of the separate
legal person analogy/metaphor was useful in particular to assert this point against the first
instance judge mad court of appeal who held respectively that the company was Salomon’s agent
and that Salomon was trustee for the company.The language used however, does not add
anything to our understanding of the real issues involved and in particular, the analogy with, or
metaphor of, person creates some problems which exhibit the typical dangers of metaphorical
thinking as Dan-Cohen write:

“By inducing misplaced analogies between individuals and organisations, the metaphor of person
easily leads to anthropomorphism: the attribution to organisations of traits and the adoption
toward them of attitudes that properly pertain to individuals only. The conception of the company

11 Dewey, ’The Historical Background of Corporate Legal Personality” 35 Yale Law

JOURNAL ,(1926) 655 at 656.
as a person in particular has contributed towards two tendencies: firstly the tendency to treat the
normative status of Corporations with similar considerations that ground and determine the legal
fights of individual human beings, and secondly, the diversion of judicial attention from the
distinctive features of organisations (many of which obviously do not correspond to the idea of
’person’) and from the normative implications of these features”.

The court’s treatment of separate legal personality

The doctrine of “piercing the veil” has been the primary method through which the courts have
mitigated the strenuous demands of the logical fulfilment of the separate legal personality
concept. The problems with finding some thread of principle through all the decisions basically
stem from the false unity of the cases which, while involving vastly different underlying issues,
are still linked under the metaphor of the ’veil’ As Blumberg writes ~the conceptual standards of
entity law are frequently regarded as universal principles and applied indiscriminately across the
entire range of the law o In that way while it is possible, as some writers have done, to
analytically organise the cases in this area in various ways, what is needed is a more diagnostic
approach which examines why rather than how the area is a problem o The point is not to simply
rationalise the disparate cases under some principle, but to point to their essential dissimilarity
and criticise the framework around which they are organised. The function of much of the courts’
work in this area is to delineate the legitimate uses of the corporate form It is obvious that the
existing framework, organised as it is around reluctant departure from the demands of a
metaphor, is inadequate for the proper articulation of such varied and complex questions.

The primary weakness of most attempt to rational the cases in the area is their tacit acceptance
and reliance on the veil metaphor. A more obvious example of this can be seen in an article by
Otto lenghi whose self-appointed task is to propose suggestions for some inroads into this jungle
of judgments.

Ottolenghi commences his analysis –“the the popular warning of Cardozo J that ’metaphors in
law are to be narrowly watched, for starting as devices to liberate thought they end often by
enslaving. . However, his analysis is divided and organised around four categories: ’peeping
behind the veil’, ’penetrating the veil’, ’extending the veil’, and ’ignoring the veil of each of
these categories he argues ’has its own appropriate set of considerations and justifications.

Such an approach is flawed in its reliance for a legal principled analysis on the concept of the
’veil’. While obviously compromised by the fact that it is ’result-driven’ its assertion that there
are considerations appropriate to categories referable to the ’veil’ allies itself to perpetuating the
very source of confusion in this area. Any framework that would align Lee v Lee’s 12 Air Farming
Ltd.(a case about whether the director of a single member family business could legally be

12 (1961) AC 12
allowed to employ myself for the purposes of workers compensation) and Walker v Wimborne 13
(a case on directors’ duties within corporate groups) on the basis of their similar treatment of the
corporate veil can only blur any understanding of the area.

The ’categories analysis’ adopted by most writers identifying particular legal categories which
have been used to justify piercing the corporate veil has similarly been criticised for being result
oriented’ and ’rarely assisting as a guide to predicting when and under what conditions another
court will be prepared to lift the veil.

In the case of :

Salomon v Salomon & Co Ltd [1897] AC 22, HL

This case is based on the concept of ‘Separate Legal Entity Of A Company’. In this case the
person name ‘Aron Solomon’ was engaged in a sole proprietorship business of shoes. Later on
his son decided to join the business therefore he made the co. named ‘Solomon & Co. Ltd.’
Which has seven members and two directors and one creditor. Aron Solomon was member of a
co. , he was also director of a co. , he was also creditor of a co.

After one year the gets liquidated. The assets of the co. have to be distributed among the
creditors of the co. Hence, Solomon was also the creditor of the co. therefore he also asked for
his share but unsecured creditors of the co. argued that Solomon was the owner/director/member
of the co. therefore he should not get the debt.

Court rejected the argument of unsecured creditors and applied the concept of ‘Separate legal
entity’ and said that in Co. Aron Solomon is a Legal Person therefore the first share of debt will
be given to Aron Solomon.

Daimler Co Ltd v Continental Tyre & Rubber Co (Great

Britain) Ltd [1916] 2 AC 307
This is another case on ‘separate legal entity of a company’. In this case German citizens
involved in the tyres & rubber co. in Germany , they further opened another co. in England
named ‘Dalmier co. Ltd.

Another co. engaged in same types of business was Continental Tyre & Rubber Co. Ltd. This co.
took the debt from German co. (Daimler Co. Ltd.) and refused to pay back.

13 (1976) 137 CER 1

Daimler Co. Ltd. filed a debt case on Continental Tyre & Rubber Co. Ltd.

Argument given by Continental Tyre & Rubber Co. was that ,Daimler Co. Ltd. was a German
co. and Germany and England are enemy/alian to each other because world war was going, and
Germany and England were opponent to each other.

Daimler Co. Ltd. argued that the concept of ‘Separate Legal Entity Of A Company’ should apply
over here.

Court rejected the argument of Daimler Co. Ltd. and held that Daimler Co. Ltd. is a German co.
which is based in England hence it is same therefore they may use the money in the against of
England.

Theories of corporate personality

1. Fiction theory:- This theory is mainly propounded by Savigny, Salmond, Kelson and
Holland . According to this theory a corporation is clothed with a legal personality. The
personality of a corporation is different from its members. Savigny regarded corporations
as an exclusive creation of law having no existence apart from its individual members
who form the corporate group and whose acts by fiction are attributed to the corporate
entity .as a result of this change in the membership does not affect the existence of the
corporation or its unity . savigny further pointed out that there is double fiction in case of
a corporation. By one fiction the corporation is given a legal entity, by another it is
clothed with the will of an individual. Thus, fictitious personality of a corporation has
also a will of its own which is different from that of its members.

Kelson also regards legal personality a fiction. To quote his words “it is convenient peg upon
which to hang legal rights and duties. Thus a group of persons or a successive series of person is
a legal person because it has an imaginary personality by fiction of law”.

Salmond also supports the view that a corporation has a fictitious existence. It is distinct from its
members and capable of surviving even after all the members have ceased to exist. Gray justifies
fiction theory on the ground that the main object of incorporation is to protect the interest of
persons having common objectives. Like fictitious personality, the will of the corporation is also
an imaginary creation of law.14

The fiction theory thus believes that incorporation is a fictitious extension of personality resorted
to for the purpose of facilitating dealings with property owned by a large body of natural persons.
The fiction theory, however, answer satisfactorily the civil and criminal liability of corporations.
If it is assumed that the will of the corporation is attributed to it by the fiction of law then it leads
14 V.N. Paranjape,”studies in jurisprudence legal theory”, central law agency.p 330
to infer that it must always be lawful as the will conferred by law can never be for unlawful and
illegal ends.

However this theory has been criticised by Sir Fredrick Pollock on the grounds that under
English law neither collective liabilities nor collective power can be enjoyed by the body of
individuals unless they are duly incorporated under the existing laws. Therefore unincorporated
bodies are not treated as legal person.

2. Realist theory: – Also known as organic theory, was propounded by Glerke, a germen
jurist . He believed that every collective group has a real mind, a real will, and a real
power of action. A corporation therefore has a real existence irrespective of the fact
whether it is recognised by the state or not. The corporate will of the corporation finds
expression through the acts and directions of its directors, employees or agents. The
existence of the corporation is based on reality and not fiction. It is a psychological
reality and not physical reality. Gray, however denies the existence of collective will. He
calls it a figment this theory has also been supported by some other jurists like Bluntschli,
Beseler Miraglia, Pollock, Maitland and Dr. Jethrow Brown. Dicey also contends that the
personality of a group is the reflection of its consciousness and will. Thus group
personality is as real as the personality of an individual.

However this theory has been criticised by J.C. Gray as he contended that collective will have no
reality, it is nothing more than mere fiction. Salmond also says that even it is assumed that that
the group will is reality, the reality of the unitary notional entity which may in law survive the
last of its members cannot be conceded to .moreover he further contends that the realist theory
cannot be applied in case of a corporation sole because it is simply a series of natural persons
whose rights are different from those natural persons in general and in case of corporation
aggregate personality is nothing more than a metaphor and a fiction.

3. Bracket theory:- Ihering propounded this theory of corporate personality .according

to this theory juristic personality is only a symbol to facilitate the working of corporate
bodies. Only the members of corporations are “persons” in real sense and a bracket is put
around them to indicate that they are to be treated as one single unit when they form
themselves into a a corporation .this theory has been advocated by American jurist
Hohfeld in a different form, in his view corporate personality is creation of arbitrary legal
rules designed to facilitate proceedings by and against an incorporated body in the court
of law. His theory has been criticised on the grounds that as it does not specifies as to
when the bracket are to be removed and when the corporate mask be lifted for taking note
of persons constituting the corporation.
4. Concession theory:– This theory presupposes that corporation as legal person has
has great importance because it is recognised by the state or the law. According to this
theory, juristic personality is a concession granted by the state to a corporation. It is
entirely at the discretion of the state to recognise or not to recognise a juristic person the
 theory closely resembles the fiction theory as it also believes that there is no juristic
personality apart from the creation of law. It is for this reason that the fiction theory is
being accepted by the followers of this theory. This theory deviates from the fiction
theory in as much as it emphasis on the discretionary power of the state in matter of
recognising the corporate personality of the corporation. Some critics consider the theory
dangerous because of its over emphasis on the discretionary power of the state in regard
to recognition of a corporation or not. In this view it may lead to dictatorship and
arbitrary restrictions on corporate bodies, particularly the political entities.
5. Purpose Theory:-This theory was propounded by Brinz, on the view that
corporations are treated as persons for certain specific purposes. The assumption that only
living persons can be the subject matter of rights and duties would have derived
imposition of rights and duties on corporations which are non living entities .it therefore
became necessary to attribute “personality” to corporations for the purposes of being
capable of having rights and duties.

These different theories were analysed by Dr. Friedmann who concluded that almost all of the
theories had a political significance and their role in attending the legal problems has been
secondary.

Advantages and disadvantages of separate legal entity concept

Legal protection
Forming a corporation offers legal protection because the business owner becomes a separate
entity from the incorporated company, Inc. notes. This distinction protects business owners from
personal lawsuits and corporate liabilities and secures their personal assets. A C corporation can
be sued since it serves as its own entity. That means the company and all of its assets and equity
are exposed to risks, while the owners remains safe.

fLiability and Taxation

“Since a corporation is a separate and distinct legal entity, owners of a corporation are only
indebted to the extent of their interest in the corporation,” according to Business Accent. This
means that shareholders are not personally liable for any company debt and creditors cannot go
after their personal assets for business debts. Similarly, shareholders only pay taxes on any
profits paid to them as salaries, bonuses or dividends and the corporation itself pays corporate
rate taxes on any additional profits at the lower corporate rate.

Perpetual Existence
The main advantage of a corporation is its perpetual existence. Since the corporation is a separate
legal entity from any of its owners, it does not dissolve when one owner leaves. If a shareholder
dies, the company may transfer her shares in the same way as any other property, and the
corporation is not negatively affected. This also allows a shareholder to disconnect from the
corporation by selling all of her shares without ending the corporation. Keep in mind that when
deciding to dissolve a company there are procedures and paperwork required.

Disadvantages
While a corporation offers many advantages, those same qualities can also make life more
difficult. It costs money to incorporate your business, as “start up, operating and tax costs are not
required of most other structures,” reports Business.gov. Corporations have rules to follow and
you must adhere to the formalities of organizing and running the company. Increased business
regulations lead to a large amount of paperwork required to both incorporate and keep accurate
tax, business and monetary records as required by law.

Conclusion
Therefore from the analysis of the studies of different theories on corporate personality
undertaken as a part of this project it can be concluded that the concept of separate legal entity is
of great importance as it imposes rights and duties on non living persons by attributing legal
personality to them. Clothed with the legal personality these corporations can own, use and
dispose of property in their own name. Moreover in case of any dispute such conferment of title
of legal personality enables the entity to sue or be sued in its own name. Therefore in the light of
above statements the concept of separate legal entity cannot be regarded as a sham concept,
though not real but not fully fictitious as well.

Annotated Bibliography

1. Thesis of nytimes last accessed on 28th march 2014.

Introduction of this Project is taken form the thesis of “nytimes”, which tells all the basic
information about ‘separate legal entity of a company’.

2. Fitzerland p.j.”salmond on jurisprudence (12th edition) p:299

An authentic book by an outstanding author, update with all topical issues on company
Law/Corporate Law in a globalized world including ‘separate legal entity of a company. The
Latest amendments with major changes adequately reflected upon. This footnote talks about the
‘legal person’ (the definition given by Salmond).

3. Dr n.v. paranjape “studies in jurisprudence legal theory,5th edition,

central law agency
An authentic book by an outstanding author, update with all topical issues on company
Law/Corporate Law in a globalized world including ‘separate legal entity of a company. The
Latest amendments with major changes adequately reflected upon.
Gray defines “person” as entity to which rights and duties may be attributed” any being that is
capable of holding a right or duty, whether it being a human or not is person in law.

4. Supra (1)
This foot note shows that the content under this note is directly related to the footnote no. 1. This
note also talks about the definition of the legal person, taken from the thesis of Ny times.

5. P.J.Fitzgerland, “Salmond on jurisprudence”,Ed. 12.universal law

publishing co.pvt.ltd.pg 66

Writer told that what Sir Salmond says about the ‘the corporate personality’. He gave the note on
page no. 66 of his book that persons are of two sorts, persons naturally created by god and
persons incorporate or politique by policy of man.

6. Harrods ltd v lemon (1931) K.B. 157

This case talks about the Evolution of the notion of corporate personality. It was held by the
court that the acts of two separate departments of a company are in law the act of the same
person.

7. Warzel v hughton (1937) K.B. 380

In this case court said that if a group of miners wish to co-operate to secure cheap delivery of
coal from the colliery at which they work, they must be careful as to the legal forms they use. if
they create an incorporated company to organise the transport a carriers licence must be secured,
since the company is carrying goods for hire or reward.
8. G.W. PATON “A TEXTBOOK ON JURISPRUDENCE” Ed.4, Oxford
University Press.
This book by Oxford University Press says that there is a clear cut distinction between the
personality of a company and the personality of its members. The company may engage in
juristic acts, sue, and be sued .though all the members change overnight, indeed even if they all
die the company remains the same legal persona. But this conception of corporate personality is
achieved but slowly.

9. G.W. PATON.,”A TEXTBOOK ON JURISPRUDENCE”,ED.4TH ,oxford

university press.
G.W. Panton says that the state in England reached a high degree of organisation on the very
inadequate theory that the state was the king and the king the corporation sole.

10.[1897] AC 22 HL
This is the citation of the case of Salmon vs Salmon & co. Ltd. , this case is completely base on
the concept of ‘separate legal entity of a company’.

11.Dewey, ’The Historical Background of Corporate Legal Personality” 35

Yale Law JOURNAL ,(1926) 655 at 656.
This footnote is inspired from the Yele Law Journal which says that the concept of the
corporation as a separate legal personality is, as Farrar describes “essentially a metaphorical use
of language, clothing the formal group with a single separate legal entity by analogy with a
natural person’.

12.(1961) AC 12
This is the citation of the case ‘Lee vs. Lee’. This case also directly related to separate legal
entity of a co.

13.(1976) 137 CER 1

This is a case of Walker v Wimborne (a case on directors’ duties within corporate groups) on
the basis of their similar treatment of the corporate veil can only blur any understanding of the
area.

14.V.N. Paranjape,”studies in jurisprudence legal theory”, central law

agency.p 330
An authentic book by an outstanding author, update with all topical issues on company
Law/Corporate Law in a globalized world including ‘separate legal entity of a company. The
Latest amendments with major changes adequately reflected upon.
Salmond also supports the view that a corporation has a fictitious existence. It is distinct from its
members and capable of surviving even after all the members have ceased to exist. Gray justifies
fiction theory on the ground that the main object of incorporation is to protect the interest of
persons having common objectives. Like fictitious personality, the will of the corporation is also
an imaginary creation of law.