The Fallacy of Complete Corporate Separateness

Abstract

Legal discourse about business entities has displayed a logical fallacy regarding the consequences of corporate separateness. A fallacy of equivocation occurs when a term is used with one meaning in the premise and with another meaning in the conclusion. Legal personality undoubtedly provides a separate – in the sense of distinct – nexus for the imputation of legal rights and duties. This, however, does not mean that corporations are or should be treated as legally separate – in the sense of insulated – from shareholders in all contexts. Moreover, legal insulation between corporations and shareholders for some purposes (e.g., limited liability) does not necessarily entail insulation for other purposes (e.g., the application of a contractual or regulatory scheme). In effect, there is significant, if varying, permeability between the legal spheres of corporations and shareholders across different areas of law, including corporate law. Rather than a nonconductor that always isolates the legal spheres of the corporation and related parties, legal personality operates as a semi-permeable membrane. Nevertheless, the recurrent fallacy of complete corporate separateness has obscured and hampered the development of legal doctrine in several contexts.

Keywords: corporate personhood, corporate separateness, fallacy of equivocation

JEL Classification: K10, K22