Day 196 Company features

Company features

In Australia, there are currently more than two millions of companies. With the population around twenty-three millions, it literally means every eleventh of us is the owner of a company. Compare to other forms of business such as sole proprietor, partnership and trust, the company is definitely the most favorable investment vehicle where people invest their money. What are the reasons behind this phenomenon? Today I would like to discuss this topic refer to the commercial law’s perspective.

As we know, the company has five distinct features that differentiate it from other types of ownership. To illustrate, these features are the limited obligations, liquidity, access for pooling of funds, perpetual life and separation of ownership and management. The first and probably the most well known one is limited liability. Which means the shareholders will not be held liable for the companies' debt. So even if the company becomes insolvent, the debtors cannot make the shareholders compensate their losses using personal assets. It is also referred as the company veil which protects its employees and shareholders. In addition, the company’s owner ship can be easily transferred through the trading of shares. Therefore, it provides a broader source of capital pooling and obtains the potential of the high liquidity. Moreover, the company will keep operating regardless the change of its ownership. Furthermore, a company is managed by the directors, hence it is separated from the ownership. Although these features create immense advantage for the company as an investment vehicle, the most important characteristic is that a company is treated as a separate legal entity. The Corporations Act (2001) s.124 defines the legal capacity of a company. It states that the company has both the powers of a natural individual and the body corporate. For example, it has the power to issue shares, to be bind by a contract or do anything that is authorized to do by any other law. As a separate legal entity, the company is treated as a separate person with its participants. Like the Salomon V Salmon & Co. Ltd. [1987] AC 22 case, where Mr. Salmon held 99% of the share in the company and acted as the actual controller. When the business went insolvency, it was not possible for the company to pay both Mr Salmon’s previous company charges and the debtors. However, the high court decided that despite Mr.Salmon was the controller of the company, the separate entity policy makes the company charge between Mr. Salmon and the company still valid. Even though the company were not able to pay its debts after this payment, Mr. Salmon was still entitled to be paid. Other case like Lee V Lee’s Air Farming Ltd. also provides insight of the separate legal entity feature. In this case, Lee’s family were still able to claim for the worker’s compensation insurance, although Lee was the controlling shareholder and director of the business. Which indicates the company can contract with its controlling participants.

In Australia, the companies are regulated under the Corporations Act (2001) introduced by the Commonwealth government. I believe the robust and adequate relations minimize the risk to invest on companies, and consequently, contributes a lot to this perfect investment vehicle