Paper F4 (ENG)
Corporate and business law
Companies and legal personality
Contents 1 2 3 The features of a limited company Types of company Advantages and disadvantages of incorporation: the veil of incorporation
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Paper F4: Corporate and business law (English)
The features of a limited company
Comparison of companies with other forms of business The meaning of separate legal personality (‘doctrine of separate personality’) Limited liability Separation of ownership from control Transfer of ownership and perpetual succession Loan capital Capital maintenance Public information about companies The statutory regulation of companies: Companies Act 2006 The regulation of financial institutions: Financial Serivces and Markets Act 2000
The features of a limited company
Companies are an alternative form to sole trader businesses and partnerships as a form of business entity.
Comparison of companies with other forms of business
Companies differ significantly from other forms of business. A sole trader is an individual who owns and runs his or her own business. The law does not recognise the business: the law recognises only the individual who runs it. The individual is liable for the debts of the business and is also personally liable for any breaches of the law by the business. An ordinary partnership is a group of individuals who own and run their own business. Each partner contributes capital to the business. An ordinary partnership business is not recognised as a ‘person’ by the law. Individual partners are personally liable, jointly with the other partners, for the debts of the business. Most companies are companies limited by shares. The capital of a company is represented by shares, and the ‘ordinary’ shareholders are its owners. Company law refers to shareholders who are owners of the company as members of the company. Companies are created by a process established by company law. A company must also have a written constitution. (Partnerships often have a constitution in the form of a partnership agreement, but this is not a legal requirement.) Unlike sole traders and ordinary partnerships, a company is a legal person, separate from its owners. This is the doctrine of corporate personality. The law recognises a company as a person, with legal rights and obligations similar to those of ordinary individuals.
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Chapter 8: Companies and legal personality
Companies are managed by their directors, not their members (shareholders). In small companies, the shareholders and directors may be the same individuals, but in large companies, the directors might hold a small proportion of the shares or even no shares at all. Any legal person can own shares in a company. This includes other companies. It is very common in practice for some companies to own some or all of the shares of other companies.
Note: Limited liability partnerships have much in common with limited companies. This will be explained in more detail later.
The meaning of separate legal personality (‘doctrine of separate personality’) It is important to understand what separate legal personality means. This may be referred to as the ‘doctrine’ of separate personality. The law regards a company as a person, separate from its owners. For example, suppose that Mr X sets up a limited company X Limited with ten shares of £1 which he owns. Mr X the individual and X Limited, for the purpose of the law, would be two separate persons - both would have a separate legal existence. A company is an ‘artificial person’, whereas individual people are ‘natural persons’. Essentially, however, the law treats persons in the same way, whether they are artificial or natural. Because it is a person, a company can enter into contractual agreements...
References: Chapter 8: Companies and legal personality
subject to extensive regulation under the provisions of the Financial Services and Markets Act 2000 (FSMA 2000)
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