Legal Personality And Limited Liability

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Introduction The doctrine of separate legal personality has been described as a double edge sword. This essay will argue that this is an apt analogy as separate legal personality while providing economic benefits and a shield of protection against liability for managers and shareholders it can also have harmful effects on other non-shareholder stakeholders such as creditors, involuntary creditors and employees. This essay will discuss separate legal personality and limited liability and the effects that these principles have on competing interests. This essay will also discuss how some of the negative effects of separate legal personality and limited liability have been lessened by statute and general law. Finally this essay will also…show more content…
Companies in a corporate group will generally not be liable for the debts and obligations of other companies within that group. The ability for members to make investments into a corporation and have no liability for corporation’s debts beyond their initial capital investment is referred to as limited liability. Limited liability is one of the major benefits of incorporation as it encourages individuals to make investment into businesses, as they are not exposed to great risk. Separate legal personality and limited liability also allows business owners to shield their personal assets from the debts of their business. –need something about managers benefits The other side of the Sword Although the principles of separate legal personality and limited liability are beneficial for shareholders and managers there is a possibility that these legal principles allow parties to avoid their legal and moral responsibilities by hiding behind the veil of the corporation. Kahn-Freund argues that separate legal personality for a corporation owned by one person opens the possibility that the company is used to defraud creditors. An example of this is where a small under-capitalized corporation incurs a lot of debt and has no ability to pay its creditors who are left with no recourse. It can be argued that when the principle of SLP is applied strictly it provides too much
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