Salomon incorporated his sole proprietorship business as a limited company with himself, his wife, daughter, and four sons as shareholders. When the business failed, creditors sued Salomon personally for debts. The High Court and Court of Appeal ruled against Salomon, but the House of Lords found that Salomon had formed a valid limited company as a separate legal entity from himself, even though he owned most of the shares. The House of Lords upheld the principle of separate legal entity for limited companies.

2.  Facts.
 Issue.
 Judgment.
 The Principle of Separate Legal Entity.

3.  Aaron Salomon was a leather trade man,
has a sole proprietorship business.
 1892, he incorporate with his sons as a
limited company.
 Any limited company, should have at least
seven persons who considers as members
of a company “shareholders”.
 Salomon himself as a managing director, his
wife, his daughter, and his four sons.

4.  The company purchased for £39,000, taking
£10,000 of them as a debt to him also at the
same time he was thus simultaneously the
company's principal creditor and its principal
shareholder.
 On the security of his debentures, Mr.
Salomon received an advance of £5,000 from
Edmund Broderip..
 shares were divide as: 20,001 shares for Mr.
Salomon, and each other subscribe take one
share, each one share worth £1.
 There were a decrease on the sales, “strike”.

5.  Salomon business failed.
 October 1893, Edmund Broderip sued
Salomon to enforce his security, which make
Salomon pay back the £5,000 of Edmund
Broderip.
 The liquidator also argued that the
debentures used by Mr. Salomon as security
for the debt were invalid, he just fraud on
them.
 The liquidators sued Mr. Salomon, since he
was the one who is taking the responsibility
over the company.

6.  Whether Mr. Salomon is liable for the debt
personally?

7.  High Court:
make a decision against Mr. Salomon. He
said that since Mr. Salomon was the creditor
of the company from the beginning as sole
proprietorship, and even if he changed the
form of the company to limited company, it
still his company because he has the biggest
part of shares, and the other subscribes are
just names and nothing else.

8.  Appeal:
They confirmed what was said in the high
court

9.  House of Lords:
The judge rejects the argument of agency
and fraud.
1. The law was clear and consist that to form
a limited company you should have at least
seven subscribers.
2. The law doesn't mention any thing about
how much should each subscriber have from
the shares, so it doesn't matter if each of them
have just one share or more.
3. The Principle of Separate Legal Entity.

10.  The Principle of Separate Legal Entity
explained that each company has it is own
personality which separate from it is
members.
 Can sue, can be sued.