Business Law – The Corporate Veil

Business Law – The Corporate Veil

It is seen that a company, as a person, has a legal identity of its own. An obvious consequence is that the company in question may become liable for the actions of the company.

  • Usually, the owners of the company are free from any liability.
  • It is assumed that the owners of the company are protected from liabilities by the company under a ‘veil of incorporation’.
  • However, there are certain circumstances when the court of law removes the veil so that the members of the corporation are not protected anymore by the veil.
  • However, there is no specific list of circumstances when the court of law is supposed to remove the veil.
  • However, the veil has been removed in the past under the following circumstances −
    • Where the formation of the company was intended for a fraudulent purpose.
    • Where the company was considered as an enemy at the time of war.
    • Where several groups of companies were regarded as one.
    • Where a company was treated as a partnership with an intent to wind up.

Duties of Separate Legal Existence

A company, after being incorporated, is considered as a separate person in the eyes of the law and the court of justice. Hence, the company is considered separate from its shareholders and the owners.

  • It has the right to sue and the company can be sued just as a natural person.
  • The liabilities of the owners and shareholders of the corporation are only limited to the value of shares invested in the specific company.

Conversion from a Private Company to a Close Company

Various difficulties may arise for a buyer when he tries to obtain a mortgage bond for paying the purchase price. According to section 38 of the Companies Act, no company is allowed to offer any financial help for the purpose of acquisition of shares of a company.

This justifies that if a company owns a particular property, the buyer cannot raise money based on this property to pay the purchase price.

  • For avoiding this limitation, a company has to be converted into a close corporation.
  • No such limitation is invoked in the Close Companies Act.
  • For a company to become a close corporation, the number of shareholders of the company must be limited to 10.
  • The shareholders must also qualify the terms, conditions and set of qualifications as aforesaid by the Close Companies Act.
  • A registration number will be allotted to the company by the registrar upon such conversion.
  • According to the Companies Act, in the context of such a conversion, the existing shareholders become the only existing members of the company and no more shareholders are allowed after the conversion is performed.
  • The new found close corporation hence adopts the name of the private company from which it is derived.
  • A certificate on the basis of the foundation of the close corporation is issued.
  • A CCI (Close Corporation founding Statement) is also registered.
  • In case the members desire to change the name of the close corporation during the conversion, the registrar’s consent is required.

Close Corporation

A close corporation can be considered analogous to a ‘younger brother’ of the company. It is way simpler and quicker to manage and maintain.

  • Annual income tax returns are required.
  • However, no audited financial statement is required by the law.
  • A close corporation can have the number of members limited to 10.
  • A close corporation also has a separate legal identity, i.e., it is also considered as a person in the views of the law irrespective of its members.
  • In many cases, a close corporation is intended for its owners to sell the properties owned by the close corporation.
  • Usually, any member of the close corporation may come into a contract on behalf of the close corporation.
  • However, restrictions may be imposed by an association agreement and the consent of a member holding a member’s interest of at least 75% or the consent of the members holding that percentage of member’s interest collectively.

Partnership

A partnership is considered to be a formal relationship between a minimum of two and a maximum of twenty members based on an agreement intended to share profits through various business ventures, where each member contributes something (either money or skills) to the business.

  • A partnership firm has no separate persona from the partners.
  • Nonetheless, it is treated as a separate entity for transaction and registrations.
  • An agreement bound by the partnership can be concluded by any of the partners.
  • The partnership will not be binding if a partner concludes a contract outside the scope of the partnership.

Trusts

A trust appears to be a complicated concept, not easily understood as a close corporation or a company. A trust does not have a separate legal identity. The law usually looks through the entity to what is behind it.

  • The rate of income tax imposed on a trust is similar to the rate of income tax imposed on a natural person and not a flat rate as imposed in the case of a closed corporation or a company.
  • A person does not own a trust.
  • A trust can neither have shareholders nor members.
  • A trust comes into existence when the founder of the trust hands over the ownership of an asset to a trustee who administers and manages the asset for the benefit of a beneficiary third person.
  • Usually, trusts are created for charitable purposes.
  • A trustee acts in his official capacity rather than his private capacity.
  • The ownership of a trust does not belong to any individual.
  • The ownership is divided between the trustees of the trust who work for the profit of a beneficiary.
  • The beneficiary does not have any control over the assets of the trust.

A Sole Proprietorship

A sole proprietorship can be considered as a single person business. It Small scale enterprises are generally owned and operated on the basis of sole proprietorship. Enterprises based on this do not require any registration. An informal trader or estate agent are probably the best examples of sole proprietors.

  • A sole proprietor is considered to be an independent legal entity.
  • There is no legal protection against claims of a sole proprietor.
  • The personal properties or assets of a sole proprietor will be at stake in case he issued.
  • As the proprietor of the business, the owner carries the full risk of his assets and losses.
  • The owner may also be subjected to sequestration.
  • In the context of sequestration, if the proprietor is married in a community of property, the ownership of the estate owned by his spouse may also be held by a natural person, a trust or any other separate legal entity.
  • In case of any uncertainties whether to hold a property in a person’s personal name, legal consultants must be consulted before signing any legal agreement.

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