A Company is a distinct legal entity whereas a partnership firm in not distinct from the several persons who compose it (The ICFAI University, 2005). When it comes to issue of liability, a partner's liability is always unlimited whereas that of shareholder may be limited either by shares or by guarantee. The main difference between a partnership and a limited company is that the liability of a company's shareholders is limited to the amount of the unpaid amount on the shares that they own2 (Complete Business Services Ltd). Partners on the other hand, can not restrict their liability i.e. as they have an unlimited liability and therefore can be held personally responsible for any unpaid debts the partnership incurs.
In a partnership firm, partners are joint and severally liable for partnership debts. Thus if one partner engages in an activity which results in large debts, all partners, regardless of whether or not they had prior knowledge of the activities would be equally liable to make good any shortfall in funds from their personal assets. But this is not the case with a company. As discussed earlier, the liability of the participants in a company is limited to the amount of shares that are held by them in the company.
The case of Salomon vs. Salomon & Co. Ltd., took place in the year 1879. ...
y purchased the business of Salomon for 39,000, and the purchase consideration was paid in terms of debentures worth 10,000 conferring a charge over the company's assets, and 20,000 shares of 1 each fully paid-up and the balance amount in cash. The company in less than one year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures and nothing was left for the unsecured creditors. The unsecured creditors contended that though incorporated under the Act, the company never had an independent existence; it was in fact an alter-ego of Salomon, the other directors being his sons under his control.
It was held by the House of Lords that "the company had been validly constituted since the Act only required seven members holding at least one share each. It said that nothing about their being independent, or that there should be anything like a balance of power in the constitution of the company3 (Ask Me Help Desk). The company is different person at law and though it may be that after incorporation the business is precisely the same as before, the same persons are managers, and the same hands receive the profits, the company is not, in law their agent or trustee. Hence, the business belonged to the company and not to Salomon."
The court observed that the company was a separate person, a separate body altogether different from the shareholders and the transfer was as much as conveyance, a transfer of property, as if the shareholders had been totally different persons.
It can be seen from the proceedings of the above discussed case that a company is given a distinct legal entity in comparison to the individuals who are managing the affairs of the company. This provides a 'veil' for