I’ve been reminded again that one of the most important legal concepts for business remains one of the most misunderstood. So, although this concept has been explained before, I’ve decided it’s worth setting out again what it means when lawyers say ‘a juristic person has separate legal personality’. In essence, it means the law sees a company, or close corporation, as an entirely separate person. Just like any human being, but slightly different… Firstly, I must point out that you do not have any legal obligation to do business through the vehicle of a company. Every natural person (i.e. every flesh and blood human being) is perfectly entitled to trade in their own name, either as a sole proprietor or with another (or up to 19 other) person(s) in a partnership. But, if you trade in this way there will be no distinction between your personal assets and your personal liabilities and the assets or liabilities of your business endeavour. There will be no limitation to your liability. If business goes badly your creditors can sell your family home to recoup money the business owes them and if you’re trading in a partnership the creditors can claim the entire amount the business owes from you (not only your proportionate share) and then you have to go sort it out with the other partners. In addition, if you trade as a sole proprietor any income the business earns is yours; if you trade in a partnership a proportionate share of the income the business earns is yours. This also means that you are taxed as if the income the business earns is your salary, so you can be asked to pay up to 40% over to SARS and your allowable deductions are limited. For these reasons, a lot of people decide to rather trade as a company. A company is viewed by the law as a separate person. Basically it has all the abilities and capacities that a human being has to own things, contract, incur liabilities and earn money. Obviously, a company can’t do things that only make sense for humans to do – like get married – and it needs to exercise its capacities through properly authorised people. But it is a separate person from it’s shareholders and its directors; it is not viewed as an extension of them. Therefore, because a company is seen as a person separate from its shareholders, if you own shares in a company your liability is limited. The company’s creditors cannot demand you pay off the company’s loans. Really, the most you can lose at any point in time is the amount of money you spent to buy shares if the company folds. This limitation of liability stimulates economic growth because people are more likely to take risks (like investing in companies) where the risk has a definite cap (the purchase price of the shares). The rational for allowing companies a more advantageous tax regime is based on this logic too. Companies are taxed differently to natural people. Typically companies are taxed on profits (so expenses you incur in running the company are deductible) and they pay a maximum of 28% tax. This makes it a good idea to conduct your business through the vehicle of a company rather than in your own name or as a partnership. Limited liability and a better tax regime are not the only consequences flowing from the separate legal personality the law affords to a company. Another consequence of a company being seen as a person in its own right is the fact that it continues to exist from the moment it is registered with the Companies and Intellectual Property Commission until it is deregistered with/by them. It has perpetual succession: it continues to exist regardless of its shareholders changing and even if some of its shareholders die. You don’t need to start a new company each time one shareholder wants out (unlike the situation with a partnership). In addition, as I pointed out above, a company can own its own stuff and make its own money. This is a very important consequence of a company’s separate legal personality. It means that the shareholders cannot just use the companies assets whenever they want to and they cannot treat the company’s bank account as their own. In fact, if a shareholder takes profits out of the company without the company having formally declared a dividend it amounts to theft and our courts have sentenced shareholders who have done this to imprisonment. The company’s assets and earnings have to be treated as completely separate from the shareholders. When you remember that shareholders are protected from the company’s creditors by the limited liability principle it only seems fair that the company’s creditors are protected from shareholders looting the company. Another really important consequence of a company being a separate person from its shareholders is that its shareholders cannot generally contract on behalf of the company nor do they have a say in the day-to-day running of the company’s affairs. The directors of the company contract on behalf of the company and manage its affairs. When the company wants to insure its assets, it cannot be done in the name of one of its shareholders, they have no insurable interest, the company enters into the insurance contract in its own name. Just as the company itself hires employees, rents premises, purchases stock and takes out loans. This concept of separate legal personality is a pretty sacred principle in South Africa company law, however, it is not absolute. There are instances when a company’s shareholder can be held liable for the debts of a company. To learn more about this lookout for our blog titled ‘When Companies and Shareholders are Viewed as One and the Same’. If you have any questions about company law or corporate governance contact Tammy-Lynne at tl.bekker@sdglegal.africa.