Advantages and Disadvantages of Incorporation of Company

Advantages and Disadvantages of Incorporation of Company

Introduction – Incorporation of the Company

  • Company, in general sense, can be defined as an association of persons coming together to carry out some business and earning profit or some income out of it.
  • According to Section 2(20) of the Companies Act 2013, Company is defined as “a company which is formed & registered under the Companies Act 2013 or any previous company law.”
  • Incorporation of the Company alludes to the lawful procedure that is utilized to frame a corporate entity or a company. It turns into a corporate lawful entity totally separate from its owners.

 

Advantages of Incorporation of Company

  1. Creates a Separate Legal Entity
  2. Company has Perpetual Succession
  3. Can Own Separate Property
  4. Capacity to Sue and be sued
  5. Capacity to raise finance
  • Creates a Separate Legal Entity: It means a company is independent and separate from its members, and the members cannot be held liable for the acts of the company, even when a specific member owns majority of shares.

Case Law – Salomon vs. Salomon & Co. Ltd. [(1897) AC 22][1]

Salomon moved his business of boot making, at first run as a sole proprietorship, to a company (Salomon Ltd.), fused with members including himself and his family. The price for such transfer was paid to Salomon by way of shares, and debentures having a gliding charge (security against debt) on the assets of the company. Afterwards, when the company’s business fizzled and it went into liquidation, Salomon’s right of recuperation (secured through floating charge) against the debentures remain before the claims of unsecured creditors, who would, thus, have recovered nothing from the liquidation proceeds.

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The claims of certain unsecured creditors in the liquidation process of Salomon Ltd., where Salomon was the majority shareholder, was looked to be made personally liable for the company’s debt. Subsequently, the issue was whether, regardless of the separate legal identity of a company, a shareholder/controller could be held liable for its debt, over and above the capital contribution, to open such member to unlimited personal liability. The House of Lords held that, as the company was duly incorporated, it is an independent person with its rights and liabilities appropriate to itself, thus, making Salomon & Co. Ltd liable, and not Salomon.

  • Company has Perpetual Succession: Perpetual succession means continuous existence, which means that a company never dies, even if the members cease to exist. The membership of a company changes from time to time, but that has no effect on the existence of the company. The company only comes to an end, when it is ended up as indicated by law, according to the provisions of the Companies Act, 2013.

Case Law – Re: Noel Tedman Holdings Pvt. Ltd. [(1967) Qd R 56][2]

It was held that a company’s members may come and go but this does not affect the legal personality of the company.

  • Can Own Separate Property: Since a company is termed as a separate legal entity in the eyes of law, it can hold property in its own name and the members cannot claim to be the owner of the company’s property.

Case Law – Bacha F. Guzdar vs. CIT Bombay [AIR 740 (1955)][3]

The Supreme Court held that a company being a legal person, in which all its property is vested and by which it is controlled, managed and disposed of a member cannot, ensure the companies property on its own name.

Case Law – Macaura vs. Northern Assurance Co. Ltd. [(1925) AC 619][4]

A shareholder of a timber company, held all shares of the company however one. He likewise insured the timber (asset of the company) on his own name, which was pulverized in fire. At the point when he looked for compensation, it was held that they were not subject to pay any money to the shareholder, in lieu of the timber since he did not own the timber and that timber, which the company possessed was not insured.

  • Capacity to Sue and be sued: The company has the capacity of suing a person or being sued by another person in its own name. A company, however, can be sued or sue in its own name, it must be spoken by a natural person and any grumbling which is not represented by a natural person is liable to be dismissed similarly in which an individual complaint is liable to be dismissed in the absence of the complainant.
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Case Law – Aspro Travel Ltd. vs. Owners Abroad plc. [(1996) 1 WLR 132][5]

It was held that just as a person has a right to his reputation, a company has also right to protect its name from being tarnished and can sue the third party for a defamatory statement made by him/her against the company.

  • Capacity to raise finance: A company is in much better position to raise the finance for capital than any other form of business entity, since a company can issue shares or debentures to the public. It is facile for the company to get loans from banks and financial institutions. This enables the company the capacity to raise larger finances. Additionally, the company can create a floating charge on its assets as security for the money borrowed by it.

Disadvantages of Incorporation of Company

  • Cost
  • Double Taxation
  • Loss of Personal Ownership
  • Required Structure
  • Ongoing Paperwork
  • Difficulty Dissolving
  • Lifting of Corporate Veil
  1. Cost – The starting cost of incorporation comprises the fee needed to document our articles of incorporation, potential attorney or accountant fees, or the cost of using an incorporation administration to help us with completion and documenting the paperwork. There are additionally ongoing fees for keeping a corporation.
  2. Double TaxationSome types of corporations such as a C Corporation, have the potential to turn into “double taxation.” Double taxation happens when a company is taxed once on profits, and again on the dividends paid to shareholders.
  3. Loss of Personal Ownership If a corporation is a stock corporation, an individual doesn’t sustain full control of the entity. The corporation is controlled by a board of directors who are nominated by the shareholders.
  4. Required Structure When we structure a corporation, we are needed to follow all of the rules stated by the state in which we filed. This incorporates the management of the corporation, operational requirements and the corporation’s bookkeeping rehearses.
  5. Ongoing PaperworkMost corporations are needed to document annual reports on the financial status of the company. The ongoing administrative work additionally incorporates tax returns, bookkeeping records, meeting minutes and any necessary licenses and allows for conducting business.
  6. Difficulty DissolvingWhile perpetual existence is an advantage of incorporating, it can also be a disadvantage because it can need significant time and money to fulfill the necessary procedures for dissolution.
  7. Lifting of Corporate VeilFrom the juristic viewpoint, a company is a lawful person separated from its members. This principle may be alluded to as the ‘Veil of incorporation’. The courts, in general, see themselves limited by this principle. The impact of this Principle is that there is an anecdotal veil between the company and its members. That is, the company has a corporate character that is distinct from its members. However, in various circumstances, the Court will penetrate the corporate veil or will disregard the corporate veil to reach the person behind the veil or to uncover the genuine structure and character of the concerned company. The reasoning behind this is mostly like that the law won’t permit the corporate structure to be misused or abused. In those conditions wherein the Court feels that the corporate structure is being misused, it will tear through the corporate veil and uncover its genuine character and nature.
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[1]. https://thefactfactor.com/tag/re-noel-tedman-holdings-pvt-ltd/

[2]. https://thefactfactor.com/tag/re-noel-tedman-holdings-pvt-ltd/

[3]. https://thecompany.ninja/bacha-g-guzdar-1955/

[4]. All Answers Ltd. (November 2018). Macaura v Northern Assurance Co Ltd [1925] AC 619 Case Summary. Retrieved from https://www.lawteacher.net/cases/macaura-v-northern-assurance.php?vref=1

[5]. https://thefactfactor.com/tag/re-noel-tedman-holdings-pvt-ltd/

Author: Ayush Patria,
Sangam University, Bhilwara (Rajasthan); 3rd Year; Law Student

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