separate legal entity

When an entity is incorporated, it becomes a legal entity in its own right. The entity has its own legal personality, which is separate to the individuals who participate in it; in the case of a company, this means the directors and the owners of the company, the members. If the company is a company limited by shares, members are also called shareholders.

The characteristics of an incorporated entity are:

1. It has perpetual existence, despite changes of its members and constitution;
2. It can own property of any kind, and thus buy and sell property in its own name;
3. It can be a party to a contract. A company is primarily liable for contracts entered into by it, rather than its directors, members and/or shareholders; and
4. It can sue and be sued in its own name.

The separate legal personality of a company means that is a different legal existence to the members. As a consequence of this, the members of a company do not own the assets of a company, nor are the members liable for its debts: they are the assets and liabilities of the company.

Separate Legal Personality

This separate legal personality results in an incorporated entity being treated in law as having its own legal rights and obligations, just as individuals.

In the Salomon v Salomon (1897), the House of Lords held that once a company is incorporated in UK law, it has a separate legal existence to the members of the company and the company to be treated like any other independent individual. Where a sole trader has incorporated a previous business (and transferred all of the assets of the sole proprietorship to the company) and contracts through the company rather than in his own name, the company is not the agent or trustee of the sole proprietor– it has its own separate legal existence.

It is this separate legal personality that makes companies an attractive vehicle for commercial ventures, as the liability rests with the company, rather than the shareholders, directors, members or company officers. This separate legal personality has the consequence that a company has perpetual succession. Its legal existence survives its members and directors. Its existence is ended when it is wound up.

Limited Liability

Limited liability is not the same as an entity having its own legal personality. For example, unlimited companies have their own legal identity with the incidents of that identity listed above. In cases such as these, the liability of the members of the company is not limited by virtue of having a separate legal identity.