The definition of capacity and the capacity of persons and legal entities to exercise rights are explained, and the problems that may arise in the management of a one-person corporation and the need for disincorporation are discussed. The criteria for the application of the doctrine of disincorporation and its necessity in the modern economy are also discussed.
The ability to be the subject of rights and obligations is called capacity. A person is born with rights capacity and retains it throughout his or her life. Thus, a person is the subject of ownership rights to property, enjoys bonds and incurs debts to others. Organizations, which are associations of people, can also acquire legal personality, which is the ability to have rights conferred by law, if they meet certain requirements. There is a type of organization that is a group of people united for a specific purpose, exists as an independent entity distinct from its members, has a governing body, and exists regardless of whether members join or leave.
Such an organization is called a division, and this characteristic of a division is called divisiveness. The members of a division are called employees. A corporation must be registered as a legal person to become a legal entity, and a corporation with legal personality is called a corporation. On the other hand, a division that has divisibility but is not registered as a corporation is called a ‘non-corporate division’. Only a person and a corporation have the ability to exercise rights, and a person’s ability to exercise rights and a corporation are strictly distinguished. Therefore, debts incurred by a corporation in its own name must be repaid from the corporation’s property, not from the individual employees.
A corporation is also a legal entity with the nature of a corporation. A stock corporation, which is a typical type of corporation, is composed of shareholders, who have an interest in the corporation in proportion to the number of shares they own. However, the Commercial Code was amended in 2001 to allow one person to establish a company as a sole shareholder by investing all the money. This recognized a form of legal entity that is not considered a corporation. This is especially useful in the early stages of a small business or venture. In some cases, a company with multiple shareholders may end up with all shares owned by one person due to inheritance, sale, or transfer of shares. In such a “one-person corporation,” the single shareholder is often the sole director of the company. When a single shareholder becomes the representative body of the company, it becomes ambiguous whether the company is managed by an individual or a corporation. The operation of a company that is a legal entity looks like the operation of a sole proprietor rather than an independent entity.
Problems sometimes arise when the personalities of the members and the legal entity appear to be indistinguishable. Under the Commercial Code, a corporation has only a board of directors as the decision-making body for the execution of its business, a representative director is one of the directors and is elected by the board of directors, and the appointment of directors and their remuneration is determined by the general meeting of shareholders. However, when there is only one shareholder, the board of directors or the general meeting of shareholders can become ineffective. In some cases, the profits generated by the company are attributed to the shareholder who is the main director, and the company itself becomes a sham. If the company is run as a sole proprietorship, and the name and form of the company is nothing more than a decoration, there may be property damage to those who have a business relationship with the company.
In this case, the “denial of corporate personality” theory is raised, which states that the corporate personality of the company should be temporarily denied and the company and the shareholder should be identified, except in relation to the specific transaction. The law does not explicitly provide for this, but the courts accept it by invoking the provisions of abuse of power. It is an abuse of the corporate system to hold a company accountable when it is completely controlled by a single shareholder, preventing the company’s accounting, shareholder meetings, or board of directors from functioning properly.
This application of disincorporation is most common in small businesses and rarely in large corporations. Especially in recent years, the number of such cases has increased due to the complexity and rapid changes in the global economy. Therefore, there are increasing calls for clearer legal regulations on the criteria and procedures for applying disclaimer of corporate personality to ensure legal stability and fair trade. This is because transparent operations and fair business relationships are essential for economic development and building social trust.
The need for denial of legal personality is also heightened by the increasing variety of business structures and forms in the modern economy. In particular, advances in the internet and technology have given rise to new business models and corporate structures, challenging the traditional concept of legal entities. In response to these changes, the legal framework needs to constantly evolve and adapt.
