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Companies and financial accounting
Companies and financial accounting

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1.4.1 Separate legal personality

All companies have a separate legal personality. The first corporations were established because separate legal personality gives a corporation a life beyond that of its individual shareholders or members. Think, for example, of the City of London Corporation, which was established in the Middle Ages and, until 2006, used to be called the Corporation of London.

Implications of having a separate legal personality include:

  • Once incorporated, the company will continue until it is formally wound up.
  • Companies can enter into contracts, or sue and be sued in their own right.
  • The personal creditors of the company’s shareholders do not have a claim on the company’s assets.
  • The creditors of the company will be paid before the shareholders, because shareholders have a residual claim on the company’s assets.

Some consider a company a ‘legal fiction’ because it is not a natural person. As such, they regard the company as a legal tool for the shareholders to increase their wealth. The more successful and profitable the company, the larger the increase in the shareholders’ residual interest in the company will be.