In Part 1, we saw that limited companies are owned by their shareholders. We also saw that a limited company has its own legal personality. It can sue, and be sued, in its own name.
Having its own legal personality has consequences. For example:
• a company is allowed to own property
• a company can be a party to a contract
• a company is liable for its own debts
• a company can sue people who owe it money – its debtors.
There is a clear division between a company (with its own legal personality) and the shareholders (the owners of the company). In company law, we say that there is a veil between the company and its shareholders.
Although there is this veil, a court will sometimes ‘lift the veil of incorporation’. The situations when a court will do this are not easy to define. The courts, generally, do not like to lift the corporate veil. The situations in which a court may do this include, for example, where the owner of a company may be gaining an unlawful advantage from the fact the company has a separate legal personality.
How are private limited companies formed?
The rules for forming private limited companies are contained in the Companies Act 2006. Many companies, however, were incorporated before 2006, under the Companies Act 1985. There are important differences between companies formed under the two Acts.
People want to form private limited companies for many reasons. The reasons often include the fact that they want to set up a new business venture or possibly to develop an existing business that they have (for example, as a sole trader).
A person who wants to form a company is usually called ‘a promoter’ of the company. The promoters of a company owe duties to the company, even before it is incorporated. These duties include the duty of good faith and the duty of disclosure. Promoters may also possibly be liable for any contracts they enter into on behalf of the company.
In the next Part, we will look at the formal steps needed to incorporate a private limited company under English law.
Using the correct preposition is very important in legal English. Look at the following sentences. Decide what preposition you think best fits in each of the gaps. Be careful: sentence 4 has more than one gap.
1. Because a private limited company has its own legal personality, it can enter ……….. contracts on its own behalf.
2. The division between a private limited company and its owners (shareholders) is called ‘a veil’. English courts do not usually want to lift this veil ……. incorporation.
3. A private limited company can be a party ……. a contract.
4. Promoters of companies may be liable …… any contracts they enter …….. on behalf ……. the company.
5. The rules for forming private limited companies in the United Kingdom are contained ….. the Companies Act 2006.
The answers are below.
4. for/under – into – of
[Note: This article is intended for educational and study purposes only. It is not intended to give legal advice. If you need legal advice on any matter, you should consult an appropriate lawyer or legal adviser.]
© Cambridge Legal English Academy 2020