Business and organisational characteristics - Legal personal...

Learning Outcomes

This article explains legal personality in the context of business organisations for SQE1 FLK1, clarifying the distinction between incorporated and unincorporated structures and the practical implications of separate legal personality. It explains how legal personality affects liability, property ownership, contractual capacity, litigation and succession, and how these principles operate for sole traders, partnerships, companies and LLPs. It explains the relationship between separate personality and limited liability, and highlights the consequences where members, directors or partners misuse the business form. It examines when the courts and statute may effectively disregard separate personality, including wrongful and fraudulent trading, trading without a public company trading certificate, and the evasion principle in Prest, while contrasting these with situations addressed through trust, agency and tort. It details how legal personality operates in corporate groups, one-person companies, pre-incorporation contracts and insurance arrangements, and how to identify the correct contracting party and litigant. It also develops your ability to apply these rules to SQE1-style multiple-choice questions and short scenarios, avoiding common exam traps.

SQE1 Syllabus

For SQE1, you are required to understand legal personality in the context of business organisations. This includes recognising the legal status of different business forms, the implications of separate legal personality, and the circumstances in which the courts may set aside this principle, with a focus on the following syllabus points:

• the distinction between incorporated and unincorporated business structures
• the meaning and consequences of separate legal personality
• the concept of limited liability and its relationship to legal personality
• the rare circumstances in which the courts may "pierce the corporate veil"
• the practical effects of legal personality for contracts, property, and litigation
• statutory interventions that impose personal liability (e.g., wrongful and fraudulent trading)
• group company issues: separate personalities within corporate groups and parent–subsidiary liability without veil piercing
• how legal personality interacts with insurance and employment relationships in one-person companies
• LLPs as incorporated bodies with separate personality and member liability rules
• pre-incorporation contracts and who is liable where a “company” is not yet formed

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following business types has separate legal personality?
   1. sole trader
   2. ordinary partnership
   3. limited company
   4. limited liability partnership
2. Which statement best describes the effect of separate legal personality?
   1. The business and its owners are the same legal person
   2. The business can own property and sue in its own name
   3. The owners are always personally liable for business debts
   4. The business ceases to exist if an owner leaves
3. In what circumstances may a court "pierce the corporate veil"?
   1. Whenever a company owes money
   2. Only when required by statute
   3. Where the company is used to commit fraud or evade obligations
   4. Whenever a shareholder requests it

4. True or false? A partnership has the same legal personality as a limited company.

Introduction

Legal personality is a fundamental concept in business law. It determines whether a business is recognised as a legal person, distinct from its owners or managers. This distinction affects liability, property ownership, contracts, and the ability to sue or be sued. For SQE1, you must be able to identify which business structures have separate legal personality and understand the consequences for clients and third parties.

In England and Wales, separate corporate personality is conferred by statute upon registration. Under the Companies Act 2006, once a company is registered it becomes a body corporate with legal personality, distinct from its members. The leading case authority demonstrating the practical significance of this principle is Salomon v A Salomon & Co Ltd [1897], which affirms that an incorporated company is not an agent or trustee of its controller: creditors contract with the company and must look to its assets. While corporate personality supports limited liability and facilitates commercial activity, the law recognises limited statutory and narrow common law exceptions when the company form is misused.

Key Term: unincorporated business
A business structure that does not have its own legal identity. The business and its owners are legally the same person(s).

Key Term: incorporated business
A business structure that has its own legal identity, separate from its owners and managers.

Incorporated and Unincorporated Business Structures

Business organisations in England and Wales fall into two main categories: unincorporated and incorporated.

Unincorporated Businesses

Sole Traders

A sole trader is an individual carrying on business in their own name. There is no distinction between the person and the business. All contracts, assets, and liabilities belong to the individual. Creditors may enforce judgments against the individual’s personal assets.

Key Term: sole trader
An individual who owns and operates a business personally, without separate legal personality.

Practical points include:

• all trading contracts are personal contracts with the individual
• business assets are the individual’s assets; no ring-fencing from personal assets
• the individual may register a business name, but this does not create a separate legal person
• lenders may seek security over personal assets; there is no corporate capacity to grant a floating charge

Partnerships

An ordinary partnership is formed when two or more people carry on business together with a view to profit. The partnership itself is not a separate legal person. Partners are jointly and severally liable for the debts and obligations of the partnership. Partners act as agents of the firm and of each other for business carried out in the usual way.

Key Term: partnership
A business relationship between two or more persons carrying on business in common with a view to profit, without separate legal personality.

Key features for SQE1:

• the firm is a convenient label, but liability attaches to partners personally
• “partnership assets” are owned by the partners, not by a separate legal person
• partners are not employees of the firm; they are co-owners
• the Partnership Act 1890 supplies default rules (e.g., authority, profit-sharing) unless varied by agreement

Incorporated Businesses

Limited Companies

A limited company is created by registration at Companies House. Once incorporated, the company is a legal person, distinct from its shareholders and directors. Private companies limited by shares are most commonly examined. Public companies (plc) have additional requirements and must not trade or borrow before obtaining a trading certificate, failing which directors can be personally liable.

Key Term: company
An incorporated business with separate legal personality, able to own property, enter contracts, and sue or be sued in its own name.

Features to remember:

• separate legal personality is distinct from limited liability, though both typically coexist
• shares are personal property and can be transferred; the company has perpetual succession
• the company can grant fixed and floating charges over its assets
• corporate groups: each company within a group is a separate person with separate liabilities

Limited Liability Partnerships (LLPs)

An LLP is a hybrid structure with features of both partnerships and companies. It is incorporated and has separate legal personality. Members’ liability is generally limited to the amount they agree to contribute. LLPs must have at least two members; if an LLP carries on business with only one member for more than six months, that member may be personally liable with the LLP for debts incurred after that point while the LLP has only one member.

Key Term: limited liability partnership
An incorporated business structure with separate legal personality, where members have limited liability.

Consequences of Separate Legal Personality

The principle of separate legal personality was established in Salomon v A Salomon & Co Ltd [1897]. Once incorporated, a company (or LLP) is a legal person distinct from its members.

Key Term: separate legal personality
The legal recognition of a business as a person distinct from its owners and managers.

Key consequences include:

• The business can own property in its own name.
• The business can enter into contracts and employ staff.
• The business can sue and be sued in its own name.
• The business continues to exist despite changes in ownership (perpetual succession).
• The liability of members is limited to their investment (limited liability).

Key Term: limited liability
The principle that members of a company or LLP are only liable for the business’s debts up to the amount unpaid on their shares or agreed capital.

Key Term: perpetual succession
The capacity of an incorporated body to continue in existence independent of changes in its members or management.

Property ownership is a common source of confusion. Company assets belong to the company, not to its shareholders. A shareholder does not have a proprietary interest in specific company property merely by holding shares. This was emphasised in Macaura v Northern Assurance Co Ltd [1925], where a controlling shareholder could not claim on an insurance policy covering timber owned by the company, because he had no insurable interest in the company’s assets. Similarly, separate personality enables a company to enter contracts even with its controller. In Lee v Lee’s Air Farming Ltd (Privy Council), the controller of a one-person company was held capable of being both director and employee: the company’s separate personality allowed a contract of employment with him in his personal capacity.

Separate legal personality also simplifies litigation: the correct claimant or defendant is the company. Members can only bring limited types of claims in respect of wrongs to the company (e.g., derivative claims under statute), but the general rule is that the company sues for wrongs done to it.

Finally, separate personality permits companies to create and participate in other legal structures: a company can incorporate another company or LLP, be a shareholder of other companies (subject to statutory limits such as the prohibition on a subsidiary being a member of its holding company), and be a partner in an ordinary partnership.

Worked Example 1.1

Scenario:
Anna is the sole shareholder and director of ABC Ltd. The company borrows £100,000 and later becomes insolvent. Anna has paid for her shares in full. The company’s assets are insufficient to pay its debts.

Answer:
Anna is not personally liable for the company’s debts. ABC Ltd is a separate legal person. Anna’s liability is limited to the amount unpaid on her shares (which is nothing). Creditors can only claim against the company’s assets.

Worked Example 1.2

Scenario:
Ben and Carla run a business as a partnership. The partnership owes £50,000 to suppliers. The partnership’s assets are worth £10,000.

Answer:
Ben and Carla are personally liable for the partnership’s debts. As the partnership is not a separate legal person, creditors can claim against the personal assets of both partners for the full amount owed.

Worked Example 1.3

Scenario:
Derek is the sole shareholder of D Ltd. He transfers all company assets to himself to avoid paying a company creditor. The creditor sues.

Answer:
The court may pierce the corporate veil and hold Derek personally liable, as the company was used to evade its obligations to creditors.

Worked Example 1.4

Scenario:
XYZ Ltd owns a warehouse. The shareholders sell their shares to new owners. Who owns the warehouse?

Answer:
XYZ Ltd continues to own the warehouse. The change in shareholders does not affect the company’s ownership of its assets.

Worked Example 1.5

Scenario:
Maya owns 95% of the shares in TimberCo Ltd. TimberCo’s timber yard is destroyed by fire. Maya insured the timber in her own name.

Answer:
Maya cannot claim under her personal policy for the loss of TimberCo’s timber because she lacks an insurable interest in assets owned by the company. The property belongs to TimberCo, a separate legal person.

Worked Example 1.6

Scenario:
Sam signs a supply contract “on behalf of NewCo Ltd” one week before the company is incorporated. After registration, NewCo Ltd receives the goods but refuses to pay.

Answer:
Under Companies Act 2006, s.51, a contract purportedly made by or on behalf of a company before it is formed has effect as one made with the person purporting to act for the company. Sam is personally liable unless the other party agreed otherwise or the contract was properly novated to NewCo after incorporation.

Worked Example 1.7

Scenario:
Olivia is the sole shareholder and director of SkyFly Ltd. She is injured while flying for the company. Her estate seeks compensation under an employment policy.

Answer:
A one-person company can employ its controller because it is a separate legal person capable of contracting with that individual. If Olivia had a valid employment contract with SkyFly Ltd, her estate can claim as an employee under the policy.

Worked Example 1.8

Scenario:
An LLP continues to operate for eight months with only one member. During month seven, it buys equipment on credit.

Answer:
The member may be jointly and severally liable with the LLP for debts incurred after six months of single-member operation. The month-seven purchase falls within that period, so the sole member can be personally liable for that debt.

Worked Example 1.9

Scenario:
ParentCo plc owns 100% of Subsidiary Ltd, which sold defective products. Claimants seek to enforce a US judgment against ParentCo on the basis that the group operates as a single economic unit.

Answer:
Absent special circumstances, courts will not disregard separate personalities in a corporate group. ParentCo is distinct from Subsidiary Ltd. The “single economic unit” argument is insufficient; separate personality will be respected.

Piercing the Corporate Veil

Although separate legal personality is the general rule, in rare cases the courts may disregard it and hold members personally liable. This is known as "piercing" or "lifting" the corporate veil.

Key Term: piercing the corporate veil
The court’s decision to disregard separate legal personality and impose liability on members or directors, usually in cases of fraud or evasion of legal obligations.

The modern approach is restrictive. In Adams v Cape Industries plc [1990], the Court of Appeal reaffirmed that each company in a group is a separate legal entity and indicated that corporate personality will not be lightly set aside. The Supreme Court in Petrodel Resources Ltd v Prest [2013] clarified that veil piercing is limited to an “evasion principle”: the court may disregard corporate personality only where a person is under an existing legal obligation or liability or subject to an existing restriction, and deliberately interposes a company under his control to evade or frustrate its enforcement. Even then, veil piercing is only available if no other, more conventional remedy suffices. Many situations previously described as veil piercing are, in fact, examples of the “concealment principle”—courts simply identifying the real actors behind a corporate structure without disregarding the company’s separate personality.

Courts will only pierce the veil where:

• The company is used to commit fraud or evade existing legal duties.
• Statute expressly provides for personal liability (e.g., wrongful or fraudulent trading in insolvency).

Statutory examples include:

• fraudulent trading: personal liability may be imposed on persons who are parties to carrying on business with intent to defraud creditors (Insolvency Act 1986)
• wrongful trading: where directors continue trading when they knew or ought to have known there was no reasonable prospect of avoiding insolvent liquidation or administration (Insolvency Act 1986)
• public company trading before obtaining its trading certificate: directors can be made personally liable for certain transactions

In other situations, the courts achieve similar outcomes without veil piercing. For instance:

• trusts/nominees: property held by a company may in law belong beneficially to the controller if the company is a nominee or trustee for him (as found in Prest)
• agency: in rare cases, a subsidiary may be the agent of its parent on specific facts, making the parent liable without disregarding the subsidiary’s personality
• tortious duty of care: a parent company may owe a direct duty of care to employees of a subsidiary where specific factors indicate assumption of responsibility (e.g., Chandler v Cape plc)

Exam Warning

The courts will not pierce the corporate veil simply because it would be fair to do so or because the company is a "one-man company." The principle in Salomon is strictly applied except in cases of abuse. Following Prest, veil piercing is confined to the evasion principle and is rare; many outcomes are reached through orthodox doctrines like trust, agency, and tort.

Legal Personality and Business Operations

Separate legal personality affects many aspects of business law:

• Property: The company owns its assets. Shareholders have no direct interest in company property. Insurance and security should be arranged in the company’s name when protecting company assets. Creditors typically rely on the company’s assets, and companies can grant fixed and floating charges over them.
• Contracts: The company enters contracts in its own name. Members are not parties. Before incorporation, any “company” contract will bind the individual who purports to act unless the parties agree otherwise or a novation occurs after formation.
• Litigation: The company is the proper claimant or defendant in legal proceedings. Where a wrong is done to the company, claims are brought by the company. Members may use statutory derivative claims in limited circumstances to enforce the company’s rights.
• Succession: The company continues to exist even if members or directors change, which facilitates investment and transfer of shares without affecting ownership of corporate assets.
• Corporate groups and duties: Separate personality is respected within groups, but a parent can owe a direct duty of care where it assumes responsibility for a subsidiary’s employees based on assumption of responsibility. This imposes liability without veil piercing.
• Participation in other structures: A company can incorporate or participate in other entities, including subsidiaries, LLPs, and partnerships, reflecting its full legal capacity as a person.

Worked Example 1.10

Scenario:
Chandler worked for SubCo Ltd, a subsidiary of ParentCo plc, in a hazardous environment. SubCo is dissolved and uninsured. Evidence shows ParentCo had superior knowledge of the risks, knew SubCo’s system of work was unsafe, and that SubCo’s employees relied on ParentCo’s oversight to protect them.

Answer:
ParentCo may owe Chandler a direct duty of care due to its assumption of responsibility. Liability arises without piercing the veil because the duty is imposed on ParentCo itself based on tort principles.

Worked Example 1.11

Scenario:
Board members of a newly formed plc begin borrowing and trading immediately. The company has not yet obtained its trading certificate.

Answer:
Statute can impose personal liability on directors of a plc that trades or borrows before obtaining its trading certificate. This is a statutory exception to the usual protection afforded by separate personality.

Worked Example 1.12

Scenario:
A lender offers a loan to LtdCo secured by a floating charge, but requires a personal guarantee from the founder-shareholder.

Answer:
Separate personality and limited liability protect the shareholder by default. However, by signing a personal guarantee, the shareholder assumes direct contractual liability to the lender, which can be enforced against personal assets despite incorporation.

Summary Table: Legal Personality in Business Structures

Key Point Checklist

This article has covered the following key knowledge points:

• Legal personality determines whether a business is a separate legal person from its owners.
• Sole traders and partnerships do not have separate legal personality; companies and LLPs do.
• Separate legal personality allows a business to own property, enter contracts, and sue or be sued in its own name.
• Limited liability is a consequence of separate legal personality in incorporated businesses.
• Shareholders have no proprietary interest in specific company assets; the company owns its property. Insurable interest must align with ownership.
• Before incorporation, contracts purportedly made “for” a company bind the person acting unless the parties agree otherwise or novate post-formation.
• Within corporate groups, each company is a distinct legal person; the “single economic unit” argument does not displace separate personality.
• Parent companies may, in limited circumstances, owe a direct duty of care to a subsidiary’s employees based on assumption of responsibility.
• The courts may only pierce the corporate veil in rare cases, such as fraud or evasion of obligations, and only when no other remedy suffices.
• Statutes can impose personal liability on those behind a company’s veil (e.g., fraudulent trading, wrongful trading, and public company trading before a certificate).
• LLPs have separate legal personality; operating with only one member for more than six months can trigger personal liability for that member.
• Personal guarantees and other direct undertakings can create personal liability notwithstanding limited liability.
• Understanding legal personality is essential for advising clients on business structure, asset ownership, contractual capacity, and liability exposure.

Key Terms and Concepts

• unincorporated business
• incorporated business
• sole trader
• partnership
• company
• limited liability partnership
• separate legal personality
• limited liability
• piercing the corporate veil
• perpetual succession