An introduction to corporate structure and liability of common law countries by Simon Reeves LLM/LLB

A company is only one of the possible legal forms that a business organization may take. Businesses organizations (or “firms”) can take several other legal forms, such as a sole proprietorship, a partnership or a trust.

Corporate veil

All company law scholars accept their Lordships’ decision in Salmon v Salmon & Co Ltd Ac 12 as the foundations point from which to contend that a company may be formed with or without limited liability and may be public or private. Whatever its form a company is a separate legal entity with its own identity distinct from that of its members. The company may even own property, be a party to contract and sue and be sued in its own name. It is a legal entity in its own right separate from its shareholders and continues in existence until it is removed from the company register.

Promoters of Companies

Those who promote companies have long been subject to common law and equitable duties to both the company and potential shareholders. There is a duty of disclosure to a potential investor, a potential remedy under contract law by the investor and there is also the tort of deceit available to the investor. Directors A director of a company must discharge his duties with such skill as he possess and to display the attention and care of a reasonable man acting in the same circumstances. Further a director also owes the company a duty to act bona fide in what he considers is in the interest of the company and not for any collateral purpose. These interests included the interest of the company’s employees and creditors as well as those of its shareholders. A director must not allow his personal interests to conflict with his duties as a director and directors must declare such conflicts of interests to the shareholders. A director must not act, or agree to the company acting, in a manner that contravenes this Act or the constitution of the company. A director of a company must not agree to the company incurring an obligation unless the director believes on reasonable grounds that the company will be able to perform the obligation when it is required to do so. A director must not agree, cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors. A director of a company when exercising powers and duties must act in good faith and in what the director believes is the best interests of the company and exercise his powers for the power for a proper purpose.

Limited Partnerships

Limited partnerships are regulated under the Limited Partnership Acts of their respectful jurisdictions. The primary purpose behind such Acts is to promote international investment and the venture capital through tax incentives. Apart from providing legislative framework which applies to limited partnerships incorporated domestically such acts often deal with limited partnerships which are formed or incorporated elsewhere but are doing business within a jurisdiction. Generally a limited partnership has legal features of both a company and a partnership. Similar to a company it is deemed to be terminated on particular events. However a limited partnership has some aspects of partnership law which makes a limited partnership a hybrid of both. Limited partnership is a legal entity of its own and is recognizable as such. Therefore it may enter into contracts and deeds, sue and be sued, grant floating charges over its assets in its own name. It is a separate legal entity from its members which avoids the problems that exist in relation to partnerships where technically is often necessary for every partner to be party to certain documents or litigation, and the creation of floating charge is not possible. A Limited Partnership is tax transparent and offers flexibility in terms of its internal organization which makes an attractive business structure for the international and domestic investors alike. It becomes an attractive option in a situation where some of the partners have special tax status such as a charity or a non resident for the tax purposes. In terms of structure a limited partnership has a general partner and limited partners – the limited partners being separate legal entities from the partnership. Registration is required. It is important to note the limited nature still means that the limited partners share the profits and losses which means that a limited partner can write off the loss on their personal tax bill. General partners are involved in the management of the limited partnership and are still jointly and severally liable for the liabilities of the partnership. Limited partners have no management role and are passive investors only – if a management role is taken outside Schedule One of the Act then they lose their limited liability status. The limited partners also have other protections under the Act:

  • No agency by limited partners – they cannot bind other partners
  • No fiduciary relationship to partnership (the general partner still does)
  • Derivative action (where shareholders take on the companies right to sue directors) by Limited Partners against General Partners.


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Reeves/Duhovnikoff & Associates Ltd. 2017