What is a veil of incorporation? Is this your first time to hear about this? Veil of incorporation identifies a company as a separate entity from its owners, investors, and employees. Once a company is incorporated, it ensures that a company has a its own legal entity. In other words, the company, its owners and investors are distinct from one another.
Veil of Incorporation: How it came to be
The veil of incorporation in the United States was adopted from the English law. This law was illustrated in the case of Salomon vs. Salomon. It was ruled that the owners and investors were separate entity from its conglomerate. This law was enacted because people were interested in investing businesses and companies because of the risks involved. To invite investors, they created a law that would eliminate their fear of the risk. This was how the veil of incorporation was born in 1897.
Veil of Incorporation: Emerging Principles
When a company is incorporated, several principles emerge as well. Below is a list of these principles.
- Limited Liability – this principle means that the company will be liable for its loans and debts. If a company is bankrupt, the creditors can’t sue the owners. They can only obtain payment from the company. This principle also entails that the profit of the company will be proportionately divided to its shareholders according to their respective shares.
- – this means that a person who invests in a company will be represented by the amount of shares he or she holds.
- Succession – when a member sells his share, the company will not be changed in itself. Any person can buy shares or sell his shares but the identity of the company does not change.
- Capital – the investors or owners pay an amount to the company in return for the shares.
- Assets, rights and liabilities – all assets of the company are properties of the company. Meaning, an investor or owner can’t claim a property of the company.
- Appointment of Directors – the members, owners, or investors have the right to vote for the directors or leaders of the company. No one has the right to self-appoint one’s self.
- Its Constitution – the company is bound to follow 2 important documents- Memorandum of Association and Articles of Association.
Veil of Incorporation: Piercing of the Corporate Veil
We have known that the veil of incorporation identifies the company as a separate entity from its owners and stakeholders. But, there are instances that this veil can be lifted or pierced. The veil can be removed, thus, the owners can be part of the lawsuit.
The veil can be lifted or pierced when the corporation has been found as a sham, a fraud, or other unlawful acts. The court which supervises these cases may look beyond the veil of incorporation. It is just that the owners who are behind this crime be sued and not be protected by the veil of incorporation. Otherwise, it is a company that will suffer leaving the owners free from the crime.
Veil of incorporation is one of the controversial and intriguing laws we have in business. This law invites more investors to invest with the assurance that the company is a separate entity. However, owners or investors should not use this veil to do wrongful acts.