ACCA Applied Skills · Corporate and Business Law (Global)

Corporations and legal personality: formula sheet

Full chapter guide

Key formulas

Unincorporated business: Sole trader or general partnership = no separate legal personality = unlimited personal liability; Owners can lose personal assets to meet business debts. In a general partnership, partners are generally liable for the firm's debts.
Incorporated business: Company or LLP = separate legal personality = limited liability for members; The entity owns the assets and owes the debts. Members' loss is normally limited to their capital or unpaid share amount.
Formation rule: Sole trader: no registration needed to start | Partnership: arises from conduct, when persons carry on business together with a view to profit (no written or express agreement needed) | Company and LLP: registration required; Some trades need a licence in any form. Registration of the business itself is the point tested.
Disclosure rule: More limited liability = more public filing; Companies and LLPs generally file accounts publicly. Sole traders and general partnerships generally do not.
Continuity: Incorporated = perpetual succession | Unincorporated = changes when an owner leaves, in general; A sole trader's business has no existence apart from the owner. On death, its assets and liabilities pass to the estate, and the business must be continued by someone else, if at all. A general partnership is often affected by a partner leaving, subject to the agreement.
Core rule: Company = separate legal person from its members and directors; Arises on registration. Applies even to one-person or family companies.
Salomon principle: Validly formed company → members not liable for company debts beyond unpaid share capital; Motive for incorporating (avoiding personal liability) does not defeat the rule.
Lee principle: Controlling shareholder can also be a director and an employee; Separate personality allows several roles and contracts with the company.
Macaura principle: Company assets belong to the company, not to shareholders; A shareholder has no insurable interest in company property merely as a shareholder.
Perpetual succession: Company continues despite death or change of members; Only liquidation or removal from the register ends it.
Separate legal personality: Company ≠ its members (once validly incorporated); The starting point for every consequence. Debts, assets and contracts belong to the company.
Limited liability (company limited by shares): Maximum member loss = unpaid amount on their shares; If shares are fully paid, further liability is nil. It applies to limited companies, not unlimited ones.
Perpetual succession: Membership changes ⇒ company continues; The company ends only on dissolution after winding up.
Property rule: Company assets belong to the company, not the shareholders; A shareholder owns shares, not specific company property.
Floating charge: Floating charge = security over a class of changing assets, with freedom to deal until crystallisation; Contrast with a fixed charge over a specific identified asset.
Default rule: Company = separate legal person; members are not liable for its debts; Salomon v Salomon. Always state this first before any exception.
Gilford Motor v Horne: Existing obligation + company deliberately used to evade it = evasion principle (veil lifted); Company was a device to avoid a restrictive covenant. Injunction against both. Prest treats it as an evasion case.
Jones v Lipman: Company used to frustrate specific performance = evasion principle (veil lifted); Seller who transferred land to his own company was ordered to complete along with the company. Prest treats it as an evasion case.
Prest v Petrodel principle: True piercing only under the evasion principle: deliberate evasion or frustration of an existing legal right; Not a general power to pierce for fairness or justice. Sham cases are explained as evasion or concealment. Concealment (revealing the facts) is not piercing. Agency is a separate route under ordinary agency law.
Statutory lifting: Veil lifted where an Act expressly imposes personal liability; Example: fraudulent and wrongful trading. Name the statute rule, not just the idea.
Group rule: Parent and subsidiary are separate persons; Control or common ownership alone does not lift the veil.
Public company: Public company = may offer shares or debentures to the public; Its name or status usually shows it is public. Rules on capital and disclosure are stricter, though exact minimums depend on the jurisdiction.
Private company: Private company = may NOT offer shares or debentures to the public; Its shares are transferred privately, often with restrictions in its constitution. Fewer filing and governance requirements apply.
Limited by shares: Member's maximum liability = unpaid amount on their shares; Fully paid shares mean no further liability to the company.
Limited by guarantee: Member's maximum liability = amount promised in the guarantee; Payable only if the company is wound up. Usually no share capital.
Unlimited company: Member's liability = all company debts, without limit; The company is still a separate legal person. Liability arises when the company cannot pay its debts.

Quick revision

A company formed by incorporation is a legal person separate from its members.
The company owns its assets; members own shares, not the company's property.
The company can make contracts and sue or be sued in its own name.
Members of a limited company are liable only up to the amount unpaid on their shares or the amount they guaranteed.
A company continues despite changes in its members; this is perpetual succession.
A sole trader and the business are the same legal person, with unlimited personal liability.
In a traditional partnership, partners are usually personally liable for business debts; check how the syllabus treats limited liability structures.
The veil is lifted only in exceptional cases, such as fraud, sham or avoidance of an existing obligation, or where statute requires it.
Courts do not lift the veil simply because the result seems unfair.
A public company may offer its shares to the public; a private company generally may not.
A limited company limits members' liability; an unlimited company does not.
Check the company name and type indicators in the syllabus rules for your variant.

Common mistakes

Treating a general partnership as a separate legal person. Fix: Remember that a firm name is only a label for the partners. Only incorporated bodies, including LLPs, have separate personality.
Saying an LLP is just a partnership with no company-like features. Fix: An LLP is incorporated. It has separate personality and limited liability for members, but it is run by its members rather than directors and shareholders.
Saying a shareholder owns the company's assets. Fix: Shares are the member's property. The assets are the company's. Cite Macaura.
Thinking a one-person company is a sham or that the owner is liable. Fix: Salomon and Lee show that control by one person does not remove separate personality.
Saying shareholders own the company's assets. Fix: Shareholders own shares only. The company owns its assets in its own name.
Saying limited liability means the company is never liable. Fix: The company is fully liable for its debts. Limited liability protects the members, capping their loss.
Saying courts lift the veil whenever it is fair or just. Fix: Tie lifting to a specific route: evasion of an existing obligation, or statute. Agency is a separate route under ordinary agency law, not piercing. Prest v Petrodel rejects a general justice power.
Lifting the veil in a group case just because the parent controls the subsidiary. Fix: State that group companies are separate persons. Control alone is not enough. Look for evasion of an existing obligation, or a true agency arrangement under agency law.
Saying a private company is the same as a limited company. Fix: Keep two labels: public or private for share offers, and shares, guarantee or unlimited for liability. A private company can be unlimited.
Thinking an unlimited company is not a separate legal person. Fix: Separate personality comes from incorporation. Unlimited status only changes what members owe if the company cannot pay.

Exam tips

Start every comparison with incorporated or unincorporated. Most other points follow from that one.
Watch for options that mix features, such as an unincorporated body with limited liability. These are usually the distractors.
In objective tests you get no marks for partly right answers, so read all four options before choosing.
If a scenario mentions registration, filing accounts or directors, think company or LLP. If it mentions partners sharing profits with no registration, think general partnership.
In written answers, name the form, state the rule, then apply it to the facts in one or two sentences.
In objective questions, look for ownership words: owns, owes, contracts. The answer turns on who is the legal person.
Learn each case by its facts and one-line holding. Questions often describe the facts without naming the case.
In a multi-task question, state the rule, apply it, then conclude. Short sentences earn the marks.