Why company is a separate legal entity?
The legal entity of a company is distinct from its members and is independent. In order to recover money from creditors of the company, they will have to go after the company and its property. Individual members cannot be sued. A company’s debts are not liable in any way for those of its members.
Neither the company’s property nor the personal property of its shareholders can be used for their personal benefit. The members of a company cannot claim ownership rights in its assets during its existence or upon its dissolution, whether individually or jointly. The members of the company, however, can enter into contracts with the company in the same manner as any other individual.
In addition, the Income Tax Act recognizes a separate legal entity for the company. Income-tax must be paid by a company on its profits and the dividends distributed to shareholders must also be taxed by them. As a result of this, the shareholders of a company are two separate entities from the company itself.
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