In this chapter, we explore in detail two key corporate law concepts; namely, the separate legal status of the corporation and limited liability. We discuss limitations and inroads into these concepts, as well as how the corporation – separate from the people who invest in or run it – can be liable in tort and criminal law.
This chapter builds on the themes raised in Chapter 2; namely, the relevance of different theoretical and ideological perspectives on the corporation and its role and purpose in contemporary society. To reiterate why these questions are important:
The broad and basic purpose of examining corporate theory is to develop a framework within which we can assess the values and assumptions that either unite or divide the plethora of cases, reform proposals, legislative amendments, and practices that constitute modern corporate law. This law has not sprung up overnight. We need some way of disentangling the differing philosophical and political perspectives from which it has been constructed. Indeed, the great benefit of theoretical inquiry is to reveal the existence of these differences in the first place.
The separate legal entity doctrine
One of the most fundamental principles of corporate law is that a corporation is regarded as a separate legal entity from the people who set it up, invest in it, or run it (the founders, members and directors). Once the requirements for incorporation have been met, and the company is registered, it is taken to exist as its own legal person. This means, for example, that a company can sue and be sued, enter contracts in its own name, employ staff, borrow money, own property, and engage in most other legal acts that a natural person can do. Whilst companies must clearly act through people (most often directors, managers, and sometimes shareholders), the legal obligations that arise from such actions are usually those of the company and do not attach to the individuals.
The separate legal entity doctrine was confirmed and applied by the House of Lords in Salomon v Salomon & Co Ltd (‘Salomon's case’), referred to in Chapter 1. This case was an important turning point in corporate law. Prior to the decision in 1897, it was generally assumed that the benefits of incorporation were primarily for use by large joint stock enterprises, rather than small ‘one-person’ companies.