Advantages And Disadvantages Of Limited Liability Companies

"Factors considered by the court in determining whether to pierce the corporate veil include failure to

This essay will explain the concepts of separate personality and limited liability and their significance in company law. The principle of separate personality is defined in the Companies Act 2006(CA) ; “subscribers to the memorandum, together with such other persons as may from time to time become members of the company are a body corporate by the name contained in memorandum.” This essentially means that a company is a separate legal personality to its members and therefore can itself be sued and enter into contracts. This theory was birthed into company law through the case of Salomon v Salomon and Co LTD 1872. This case involved a company entering liquidation and the unsecured creditors not being able to claim assets to compensate them. The issue in this case was whether Mr Salomon owed the money or the company did. In the end, the House of Lords held that the company was not an agent of Mr Salomon and so the debts were that of the company thus creating the “corporate Veil” .

Although courts are reluctant to hold an active shareholder liable for actions that are legally the responsibility of the corporation, even if the corporation has a single shareholder, they will often do so if the corporation was markedly noncompliant, or if holding only the corporation liable would be singularly unfair to the plaintiff. The ruling is based on common law precedents. In the US, different theories, most important "alter ego" or "instrumentality rule", attempted to create a piercing standard. Generally, the plaintiff has to prove that the incorporation was merely a formality and that the corporation neglected corporate formalities and protocols, such as voting to approve major corporate actions in the context of a duly authorized corporate meeting. This is quite often the case when a corporation facing legal liability transfers its assets and business to another corporation with the same management and shareholders. It also happens with single person corporations that are managed in a haphazard manner. As such, the veil can be pierced in both civil cases and where regulatory proceedings are taken against a shell corporation.

The case of H.K. Porter Co., Inc. 87 T.C. 689 (1986) also had a subsidiary liquidate assets and the distribute failed to cover the preferred stock’s liquidation preference. On its 1978 and 1979 Federal income tax returns, petitioner claimed losses with respect to its Porter Australia stock. In his notice of deficiency, respondent disallowed said losses because "under I.R.C. Sec. 332, no gain or loss is recognized on the receipt of property distributed in complete liquidation of a subsidiary corporation." The court ruled in favor of H.K. Porter. “Finally, because we have held that section 332 does not bar the recognition of petitioner's losses, we hold that, based on the record, petitioner is entitled to an ordinary loss of $249,981 in 1978 with respect to the worthlessness of its common stock and a long-term capital loss of $1,957,770 in 1979 with respect to its preferred stock. See sec. 165(a) and (g).”

In fraud committed against organizations, the victim of fraud is the employee’s organization. In frauds committed on behalf of an organization, executives usually are involved in some type of financial statement fraud; typically, to make the company’s reported financial results appear better than they actually are. In this second case, the victims are investors in the company’s stock. A third way to classify frauds is via the use of the ACFE’s occupational fraud definition, “the use of one’s occupation for personnel enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” (ACFE, 2010). The ACFE includes three major categories of occupational fraud: asset misappropriations involves the theft or misuse of the organization’s assets, corruption involves the wrongful use of influence in a business transaction in order to procure benefits contrary to their duty to their employer, and fraudulent financial statements involving falsification of an organization’s financial statements for personal gain.

In addition (Chen-Wishart n.d), notes that a company is categorized as a legal personal and operates as distinct from its shareholders. Based on these statements, Betty had not right to act on behalf of Bechdo Pty Ltd and Bechdo has the capacity to sue Betty for acting contrary to the company constitution. Based on the case study, Betty had breach the contract which existed between her and the company laws. If an act carried is outside the objects for which the company was founded to as contained in the company’s memorandum of association which is this case is the company’s constitution, then the acts are deemed to be ultra vires. In other words, the acts are beyond the capacity of the organization. In addition, contracts which are deemed ultra vires are categorized as void (Palmiter 2009, p.59). This can be referenced to Ashbury Railway Carriage and Iron Co v Richie 1875. The doctrine of ultra vires which have deemed the contracts between Bechdo Pty Ltd and BB Ltd, Jillo Pty Ltd, and Con Development Ltd as void has been applied with the aim of protecting the interests of lenders and company shareholders. As noted by Chen-Wishart (n.d), ultra vires is necessary in protecting the interest of its shareholders who depend on objective clause of the constitution to limit the acts in which their money may be used.

The Appellate and trial court decisions were affirmed and the Court found for the Defendant. The Court held that ‘piercing the corporate veil’ is invoked to ‘prevent fraud or to achieve equity’. In this case the Court found no evidence of fraud, misrepresentation nor illegality. Although the defendant controlled Westerlea’s affairs, Westerlea maintained an outward appearance of aDseparate corporate identity at all times. Further, the creditors were not misled, there was no fraud, and Defendant performed no act to cause injury to the creditors of Westerlea by depletion of assets or otherwise.

To support his position, Garrett points to the decisions of two federal courts of appeals that have held “in the context of non-prosecution agreements [that] the government is prevented by due process considerations from unilaterally determining that a defendant is in breach and nullifying the agreement.”37 This sort of judicial review, however, does not offer sufficient safeguards for companies, nor is it constitutionally required when it matters

The fundamental question presented by the case is if Albion C. Cranson, Jr. is a partner with Real Estate Service Bureau and therefore liable for the debts incurred in purchasing typewriters form IBM. Albion C. Cranson, Jr. contended that the Real Estate Service “Bureau was a de facto corporation and that he was not personally liable for its debts “(Warner, et al., 2012, p 693).  Furthermore, it is stated “The fundamental question presented by the appeal is whether an officer of a defectively incorporated association may be subjected to personal liability under the circumstances of this case” (p. 694). The decision was that Cranson was not liable for the debt because “I.B.M. is estopped to deny the corporate existence of the Bureau, we hold

Breaches of s180-184 of the Corporations Act 2001 (Cth), and Breaches of Common Law and Equitable Principles

“Piercing the corporate viel” refers to the judicially imposed exception to this rule by which courts disregarded the separateness of the company and consider a shareholder responsible for the company’s action as if it were the shareholder’s own. A fundamental rule of corporate law is that shareholders in an organization are not liable for the obligations of the enterprise beyond the capital that they contribute in exchange for their shares.

Choosing a Corporation/Company Structure - the business structure of a company/ corporation is highly recommended, it has the flexibility to gain more capital, or credit capability and assets used as security. Based on the Corporation Act 2001 (Cth) AC 22, a corporation is another legal entity with their own legal rights, duties and responsibilities separate to the individual or owner of the company (Harris, Hargovan & Adams, 2013, pp 229). The risk and consequences are one of the principal considerations of choosing a company structure (Harris, Hargovan & Adams, pp 50). Based on the “Corporate Veil” Liability is owned by a separate legal entity and not to the extent of the owner, for instance, the debt of the company is not a personal liability, but the company. This is further explained in the case below.

Furthermore, the principle of separate legal entity provides an ideal vehicle of fraud . “$2 Company” is an example. The company was formed as limited company that undercapitalised. Shareholders and directors are not liable for the large debts that the company incurred when the company couldn’t repay

When a company is incorporated it is treated as a separate legal entity distinct from its promoters, directors, members, and employees, which confers the benefit of not being responsible for the companies debt on the members on the company. However even though a company is a separate legal entity and it attains the advantage of not laying the responsibility of company’s debt on the

In this task, I will be evaluating the advantages and disadvantages of s partnership and private limited company. How majority shareholders protect their interests on the board of directors. Clarifying the rights and duties of a company director and how one is appointed to being a manager director. In addition the rights and duties of company auditor as well as their liabilities as an auditor.