Key Takeaways

  • Corporate personality means a corporation is treated as a separate legal entity, distinct from its owners or shareholders.
  • This status allows corporations to own property, enter contracts, sue and be sued, and remain intact even if shareholders change.
  • Limited liability protects shareholders from personal responsibility for corporate debts, except in cases of fraud or veil-piercing.
  • The concept has evolved through case law and continues to shape corporate rights and obligations, including debates over corporate personhood and constitutional rights.
  • Understanding corporate personality is crucial for corporate governance, tax compliance, and legal risk management.

The meaning of corporate personality is the idea that a corporation is its own entity. Corporations, unlike pass-through business entity types or disregarded entities, can be taxed, buy and sell property, and take part in lawsuits. 

What Is a Corporate Personality?

Not only are corporations considered their own business entities, but they can own property. Property owned by a corporation can only be taken away under due process. 

There are a number of concerns still debated in corporate law regarding the meaning of corporate personality including:

  • Whether corporations are separate from their members and any other individuals associated with the company.
  • How and when the corporate veil is lifted.
  • Whether a corporation, as its own taxable entity, should actually be treated as a United States citizen.

Evolution and Origins of Corporate Personality

The idea of corporate personality traces back to Roman law, where certain groups like guilds and municipalities were treated as collective legal entities. The modern legal concept emerged in English common law, particularly through the development of joint-stock companies during the Industrial Revolution. This framework allowed investors to pool resources without risking personal assets beyond their investments.

The doctrine was solidified by landmark decisions like Salomon v. A. Salomon & Co. Ltd. (1897), where the House of Lords upheld that a corporation is distinct from its shareholders, even when owned by a single person. This principle laid the foundation for how corporations operate globally today, providing legal and financial separation between a business and its participants.

Separate Legal Entity

Any business viewed as a separate legal entity has many similar rights to human beings and legal citizens. The existence of a separate legal entity is completely distinct from the existence of its owners. This means that, unlike some business types, the company doesn't dissolve upon the death of a member. 

Businesses that are registered as separate legal entities continue to live on until they are dissolved on proper grounds. 

Corporations and other separate legal entity types can do the following:

  • Open their own bank account.
  • Pay taxes.
  • Own property.
  • Take out loans.
  • Incur liability.
  • Partake in contracts.

Rights and Responsibilities of a Corporate Personality

Corporations, as separate legal entities, are granted various rights and responsibilities under the law. These include the ability to:

  • Own and transfer property.
  • Enter into enforceable contracts.
  • File lawsuits and be sued.
  • Hire employees and establish business operations.
  • Pay taxes independently from shareholders.
  • Maintain perpetual existence regardless of ownership changes.

However, corporate personality also comes with obligations, such as compliance with regulatory requirements, tax filings, and adherence to corporate governance standards.

Limited Liability of Corporate Personality

The members within a separate legal entity can actually enter into a legal agreement with the company itself and take legal action against the company, if needed. This ability for the company to be sued and held liable provides the corporate veil or liability protection that corporations are known for. Creditors may come after the company for any debts, but not its owners or shareholders. 

When a business owner starts a corporation, they must keep their personal and business finances separate. The company should have its own bank account, assets, and so on. Keeping this appropriate separation from the personal affairs of business owners prevents courts from piercing the corporate veil and protects owners from liability.  

The member of a business entity with a corporate personality can only be held liable, in the event of a lawsuit, up to the amount of their capital contribution. Any debts that a business takes on as its own entity are the responsibility of the business and not its members or investors. If members or owners cosign on business loans or contracts, however, they may be held liable in those instances. 

Piercing the Corporate Veil

While corporate personality provides limited liability protection, courts may pierce the corporate veil in certain situations to hold shareholders personally liable. This typically occurs when:

  • The corporation was used to commit fraud or wrongful acts.
  • There is insufficient separation between the corporation's finances and personal finances of the owners.
  • Formal corporate procedures, like maintaining meeting minutes or proper recordkeeping, were not followed.

The decision to pierce the veil is made on a case-by-case basis and aims to prevent abuse of the corporate structure for unethical purposes.

Case Law Regarding Corporate Personality

The ruling in Collins Stewart Ltd vs. Financial Times set the precedent that companies cannot have complete human rights because they are inherently non-human. For example, a business cannot sue for injury based on offense or injured feelings because companies do not feel emotion. 

In Bacha F. Guzdar vs. The Commissioner of Income Tax, Bombay the court ruled that shareholders are not actually owners in the company. Bacha F. Guzdar was a shareholder of a tea company in 1952. She received dividends from her shares. When it came time for her to pay taxes on her dividends, due to the double taxation of corporations, she argued that she should only be required to pay taxes on 40 percent of those dividends because they were agricultural income. 

Agricultural income was not taxed at the time, and the tea company's income was considered 60 percent agricultural. Because dividends distributed to shareholders were meant to represent the income of the business, it was a logical conclusion that Guzdar's dividends were 60 percent agricultural and therefore 60 percent tax exempt. 

The court ruled that Guzdar's income was not, in fact, partly agricultural as the company's income was. This set the precedent that shareholders are separate entities from the companies in which they invest. Shareholders have rights in the business when it comes to voting and profit distribution, but their income is not the same as the company income, they are separate entities altogether. 

Corporate personalities afforded to companies that are registered as separate legal entities protect business members and shareholders from liability, keep the company going in the event of a member's death, and offer independence to the business legally and financially. 

Corporate Personhood and Constitutional Rights

The concept of corporate personality intersects with debates over corporate personhood, particularly regarding constitutional rights. In the United States, several key court cases have shaped this discussion:

  • Santa Clara County v. Southern Pacific Railroad Co. (1886): Suggested that corporations are "persons" entitled to equal protection under the Fourteenth Amendment.
  • Citizens United v. Federal Election Commission (2010): Recognized corporate rights to free speech in the context of political campaign financing.
  • Burwell v. Hobby Lobby Stores, Inc. (2014): Extended certain religious freedom rights to closely held corporations.

These rulings reflect ongoing legal and ethical debates about the extent of rights that should be granted to corporations, particularly regarding political influence, speech, and religious expression.

Frequently Asked Questions

  1. What does corporate personality mean?
    Corporate personality refers to the legal recognition of a corporation as its own entity, separate from its owners and shareholders, with its own rights and obligations.
  2. Why is corporate personality important?
    It provides limited liability protection to shareholders, enables companies to enter contracts, own property, and ensures the business can operate independently of its owners.
  3. Can the corporate veil always protect shareholders?
    No, courts may pierce the corporate veil and hold shareholders personally liable if the corporation is misused for fraud, evasion of obligations, or if corporate formalities are ignored.
  4. Do corporations have constitutional rights?
    In the United States, corporations have been granted certain constitutional rights, such as free speech and equal protection, though the extent of these rights remains controversial.
  5. How does corporate personality affect tax obligations?
    Corporations are taxed as separate legal entities. They must file their own tax returns, and profits may be subject to corporate taxes and shareholder taxes (double taxation), depending on the business structure.

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