Benefits Of Incorporating A Company And The Doctrine Of Limited Liability In Corporate Law

Advantages of Incorporating a Company

Discuss about the Evading Liability of CMS Regarding.

After going through the facts that are present in this question, it has to be considered, which business structure will be most appropriate for Richard and his sons because they are willing to expand their business. It appears that in the present case, the incorporation of a company will be the most suitable choice for Richard and his sons. The reason is that several benefits will be available to them as compared to running their business as a sole trader or partnership. Therefore if Richard decides to incorporate a company, several benefits will be available to them due to which it will be easier for him to expand the business. For example, it is easier for a company to raise funds for the expansion of the business. Even if the cost incurred in registering the company is higher than running the business as a sole trader or partnership, but this cost can be treated as a part of business expenses. In the same way, if Richard decides to register business name only, it will be less costly as against registering a company but in such a case, the benefits of incorporating a company will not be available. However, the law provides that if Richard and his sons decide to incorporate a company, there is no need for the registration of the business name. When a company is registered, company’s full name ending with “Pty Ltd” can be used either by these. Regarding the ongoing costs of the business, it is required under the law that there is a need for the renewal of the registration of the business name. For doing so, a fee has to be paid to the government. In case of a company, the Australian Securities and Investments Commission charge the annual renewal fee.

When the owner of a business decides to incorporate the company, a significant advantage is available to such a person in the form of the Limited liability of the owners. According to the law, when a company has been incorporated, the shareholders and directors of such a corporation are only liable to the extent of their shares in the company. On the other hand, when the business is being run as a sole trader or partnership, the owner of the business is personally liable for the obligations of the business (Harris, Hargovan,  Adams, 2015). Another significant advantage that is available to the persons who have incorporated a company in order to run their business is concerned with the rate of tax. They provided the persons managing business by registering a business name are required to pay tax at the normal marginal rate. On the other hand, a flat rate applies in case of a company, which is much less than the rate that applies in case of individuals (Vermeesch and Lindgren, 2005).

Choosing a Name for the Company and Business Name Registration

A company is also allowed to own property, and also to enter contracts under its own name. The reason is that it is conceded by the law that after a company has been registered, it acquires its own legal identity. Consequently, in the eyes of law, a company is a separate entity, different from its owners and controllers (shareholders and directors).

As a result of the importance that is related with selecting the most appropriate subject for running the business, it is very significant that the business owners always go for the business structure that is most suitable for them. For example, Richard and his sons want to expand their business (Pentony et al., 2009). In order to make this decision, all the circumstances be to be taken care of. In the present case, the adjoining property of the neighbor has been busy is violated in order to expand his business. Similarly, his sons, David and Liam have also decided to join Richard. Under these circumstances, it can be concluded that Richard and his sons should opt for the registration of a company. This will also help them in raising the funds required for expanding the production.

Another issue in this case is that Richard desires to use the name “Ridali” for running the business. On the other hand, David and Liam wish that the name of the business should be “Rich’s Guaranteed Olives” to honor their father. At this point, it is worth mentioning that there is a difference between the registration of a company and registering a business name. While selecting a name for their company, owners should take care of certain issues. For instance, the company’s name should not be matching with the name of an existing company. Therefore the parties may only use a name that is not similar to the name of an existing company or name of a business. So a name availability search is always advisable in such cases. The corporations’ law provides that when an identical name is going to be used by the parties, the name may be registered by the parties as the name of the company. In this regard, the law also provides the certain words cannot be used because they may mislead the general public. For example, the words cannot be used in the name of a company which points out any association with the government, ex-servicemen or royal family.

Liability of Members and Display of Company Name

Another legal requirement that has been imposed in this regard is that the companies mentioned also showed the liability of its members. Therefore, for instance, if the liability of the members is limited regarding any unpaid amount concerning the shares held by them, it is necessary that the company’s name should end with “Pty Ltd” or “proprietary Limited”. On the other hand, if reliability of the members is unlimited, the name ends with “Pty” or “Proprietary”. Similarly if the owner of the business wants to display a different name, the law provides an option to such owners. They can register the different name as the business name. As a result of this provision, it is possible that Richard’s company may be called “Rich’s Guaranteed Olives” and at the same time, the company may also register the name “Ridali” as its business name. Under these circumstances, the business can use the name “Ridali” for all purposes.

After going through the facts that are present in this question, it has to be seen if Terry and other employees of Cosmo Mine Ltd. (CM) can sue the company for the injuries suffered by them as a result of the use of asbestos. These workers were working for Cosmo Mining services Pty Ltd. (CMS), of which CM was a subsidiary. The shareholders of CMS unanimously passed a resolution which provided that a new company will be created by them. The business of CMS was going to be sold to the new corporation and CMS was to be wound up. Under these circumstances, the issue arises if Terry and other workers can bring action against the parent corporation or against the newly formed corporation.

In this regard, the general rule of the corporations’ law provides for the distinct legal identity of a company. The base for this rule was the judgment delivered by the court and Salomon v Salomon (1896). According to the decision of the court delivered in this case, it was held that a corporation is a different legal entity in the eyes of law. Therefore, it is provided by this doctrine that the existence of a company is separate from its members. Hence, certain benefits are available to a company. For example, a company can own property under its own name. The obligations of the company are also considered the company’s liabilities itself and not of its members. Therefore these liabilities can only be enforced against the company itself. As a result of this doctrine, another doctrine has also emerged which is present in the form of limited liability of company’s members. According to the doctrine of limited liability, it has been provided by the law that the liabilities of the company can be imposed only against such company (Crosling, 2009). Therefore, the obligations and liabilities of a particular company are treated by the law as being enforceable only against the company itself. The members and controllers of the company cannot be held at the regarding these obligations.

Exception to the Doctrine of Limited Liability: Piercing the Corporate Veil

However at this point it needs to be mentioned that the rule mentioned above is a general rule. An exception applies to this rule. It is known as piercing the corporate veil. According to the corporations’ law, in some cases, the courts are allowed by the law to set aside the doctrine of distinct identity. In such cases, the courts may decide to lift the corporate veil. The decision to lift incorporated can be where liability has to be imposed on persons having control over the corporation. Such a requirement is also present under the tort law which has been provided that in cases of negligence, there should be a relationship of proximity between the parties. Similar requirement can also be applied in piercing the corporate veil. In Barrow v CSR Ltd (1988), where the court was of the opinion that liability should be imposed on the parent company for the tort done to the employees were working for a subsidiary. In this case, as a result of negligence, the employees who were working for the subsidiary company suffered from asbestosis. While delivering its decision, the court said that it was irrelevant if the matter has been described using the principles of agency law or the proximity between the employees of the two companies or if lifting the corporate veil is used. In all the cases, the ultimate result will remain the same. Similarly in Briggs v James Hardie & Co Pty Ltd (1989), the court expressed the opinion that the issue was related negligence and the court had to decide the issue of lifting the corporate veil.

Considering the legal position mentioned above, the current situation can be described that if in a particular case, the subsidiary company is short of the resources to compensate the other party; the law allows such a party to claim from the other party that has ultimate control over its subsidiary. In view of this legal position, it can be decided in the present case also that Terry and co-workers may claim compensation from the parent company, CM. it has been decided by the shareholders of CMS that the company should be wound up and its business should be sold to a new company formed by them, Lazarus Pty Ltd.

However, it is clear in this case that the new company has been created only for the purpose of evading the liability of CMS regarding the claims that may be initiated by its former employees and residents of Gunbarrel. These residents contracted cancer as the water supply was contaminated by the company. At the same time, the subsidiary company is short of resources for payinga this compensation. The patent company CM owns 120 out of 200 shares of CMS. CM also has complete control on the activities of its subsidiary company. It has also leased the mining equipment, which was sub-leased to the subsidiary company.

Under the circumstances, it can be concluded in the present case that Terry can bring a claim against the parent company or against the newly formed company for the purpose of claiming compensation. In the present case, the court may decide to lift the corporate veil and impose liability on the persons controlling the subsidiary company.

References

Crosling G M, (2009) Murphy H M, How to Study Business Law 4th Edition, Butterworths,

Harris, J. Hargovan, A.  Adams, M. (2015) Australian Corporate Law LexisNexis 5^th edition  Butterworths 

Pentony, Graw, Lennard & Parker, (2009) Understanding Business Law 3rd ed Butterworths

Vermeesch, R B, Lindgren, K E, (2005) Business Law of Australia, 11th Edition, Butterworths

Barrow v CSR Ltd (1988) Unreported

Briggs v James Hardie& Co Pty Ltd (1989) 16 NSWLR 549

Salomon v A Salomon & Co Ltd [1896] UKHL 1