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Corporations Are People Too.
The title is not quite accurate, but the common law in Canada and elsewhere has developed the notion that a corporation is a separate legal entity from those who run it, and at law it is a “person”. A corporation has, in law, the same rights, power and privileges of a natural person. The most obvious of these powers is the ability to possess assets and incur liabilities that are separate from the corporation’s owners and managers.
The legal priniciple that corporaions are separate from their owners and managers forms the foundation of corporate law. Because the corporation is separate from its shareholders, director, officers and its employees it provides as a way to disconnect those individuals from the risks that are undertaking in the name and form of the corporation itself. For the individuals who invest in the corporation this entitles them to a share of the “residue” of the corporate assets without risking more than they put into the corporation. At least in theory; much has changes in the concept of corporate law over the last hundreds of years.
And, the “residue” or residual profits of a corporation can be astonishing. Think of the value of Microsoft Corporation for example. The residual value of that giant corporation belongs, at law, to its shareholders who have most likely bought its shares on a stock exchange.
Early Development of Corporate Law
The most well known case covering the “separateness” of a corporation from it’s owners is the 1897 decision in Saloman v Solman & Co. a decision of the English courts which still is considered by every law student in Canada as they work towards their degree.
Mr. Soloman’s company, a limited liability company, had 7 shareholders including Mr. Soloman, his wife and five children. Mr. Soloman kept 20,001 of 20,007 shares and his family members each owned one. The basic structure of his corporate set up was not unlike one that would be set up today, and Mr. Soloman was both the largest shareholder and major creditor of Soloman & Co. in the form of a debenture.
Soloman & Co. became insolvency. As it turned out the assets of the company were suffiecnt to repay Mr. Soloman’s debenture but not its unsecured creditors. The litigation ensued and the courts declared that as Mr. Soloman had no improper motive in forming his corporation and followed the rules, that the corporation must be held to be its own “person” and the creditors of the company could not seek compensation with Mr. Soloman.
Key Benefits of operating through a Corporation
The main benefit as can be seen from the example above is that investor and managers of a corporation avoid the risks properly taken on in the name of the corporation itself. The investor liability is capped or “limited” to the amount of their equity investment, though the modern law has developed situations and structure where this maxim does not hold true. Ordinarily, this case holds and public investors are encouraged to invest in corporations without fear of taking on liabilities that they may not know or understand.
So, in that way the Corporation is of tremendous benefit as it increases the amount of capital to be put to work in an economy by transferring risk from the investors on to the counterparties who deal with the corporation.
Much of modern litigation involves creditors suing corporations and often frustration occurs for smaller individuals who may not have known or understood they were dealing with a corporation and not the individual who represented that corporation in their dealings. That transfer of risk onto the corporation’s counterparties may not seem fair at times, but both policy and law have maintained the corporate form to be essentially impenetrable when properly used and when no fraud exists.
If you are a creditor of a corporation or wondering if the benefits of incorporating are worth the cost contact us at Baker Law Firm and we will be pleased to assist.
Roger J. Baker, Barrister & Solicitor; and
Justin Williams, Summer Research Student
Date: July 25, 2019
References: Saloman v A Soloman & Co LTD 1896 UKHL 1, 1897 AC 22