Question

What are some advantages of incorporating your business? What are some reasons why you wouldn't want to incorporate?

Answer 1

The incorporation of a company refers to the legal process that is used to form a corporate entity or a company. An incorporated company is a separate legal entity on its own, recognized by the law. These corporations can be identified with terms like ‘Inc’ or ‘Limited’ in their names. It becomes a corporate legal entity completely separate from its owners.

Advantages of Incorporation of a Company

1. Corporate Personality

2. Limited Liability

3. Perpetual Succession

4. Transferable Shares

5. Separate Property

6. Capacity to Sue

7. Flexibility and Autonomy

1. Corporate Personality

An incorporated company is a legally recognised entity that exists separately from its owners and shareholders, which is different from partnership companies.

2. Limited Liability

The Companies Act provides that in event of a company being shut down, the members of the company are solely liable to contribute to the assets and liabilities of the company. It is in accordance with the Companies Act – Section 34(2).

However, in the case of companies that have been incorporated, none of its members is legally bound to contribute to anything more than the nominal value of shares held by the member which still remain unpaid.

The advantage of having limited liability for its members is one of the major reasons for setting up an incorporated company.

3. Perpetual Succession

As provided by the Companies Act Section 34(2), an incorporated company has the characteristic of perpetual succession.

In spite of any changes in members of the company, the company will be the same entity with the same privileges, immunities, estate, and possessions.

The death or insolvency of individual members does not affect the incorporated company in any way or form. The company will continue to exist indefinitely till the company is shut down.

As the Companies Act states, ‘Members may come and members may go, but the company can go on forever.’

4. Transferable Shares

Section 82 of the companies act states that ‘The shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.’

This leads to the investment of funds in shares. It is done so that members can members can encash shares at any given time upon their will.

5. Separate Property

An incorporated company as a recognised legal entity is permitted to own its own funds and also other assets. ‘The property of the company is not the property of shareholders, it is the property of the company.’

‘The company is the real person in which the property is vested, and by which it is controlled, managed and disposed of.’ And thus, under the law, if a majority shareholder uses the company’s resources for personal reasons, he is liable to be held for criminal misappropriation of company funds.

6. Capacity to Sue

As a separate legal entity, an incorporated company has the right to sue other people in addition to companies. In turn, it can be sued by other companies and people.

7. Flexibility and Autonomy

The company has an autonomy and independence to form its own policies and further, implement them. However, they are subject to the general principles of law, equity and a good conscience.

In accordance with the provisions that are mentioned in the Companies Act, Memorandum and Articles of Association.

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Disadvantages of Incorporation

1. Formalities and Expenses

2. Corporate Disclosure

3. Separation of control from ownership

4. Greater Social Responsibility

5. Greater Tax Burden in Certain Cases

6. Detailed Winding Up Procedure

1. Formalities and Expenses

Incorporation of a company is a very complex legal process and It involves a considerable amount of time and money. These elaborate procedures have been established so as to discourage people from doing business who not serious and passionate about it.

Even after the incorporation of the company, it has to be run and managed very strictly. In accordance with the legal provisions provided by the Companies Act. The returns and other documents have to be registered at the Registrar of Companies.

Certain particular events or activities such as accounts, corporate audits, meetings, borrowing, lending, investment and issue of capital, dividends etc, are necessarily required to be conducted and carried out by the provisions of the Companies Act.

2. Corporate Disclosures

In spite of the extensive legal framework designed to ensure maximum transparency and disclosure of corporate information, the employees and low-level members of the company have restricted access to the company information and higher management.

3.Separation of Control from Ownership

Members of small shareholders of a company do not have any effective form of control over the functions and decisions of the company.This happens because the number of people in the company is so large that an individual or even a small group of people cannot have a big effect on the working of the organisation.

Thus, the position termed as ‘ownership’ of the company is just a term that has no real significance. They do not have any active or complete control over the companies workings.

3. Greater Social Responsibility

Many incorporated companies have a net worth of billions of dollars and thus employ hundreds of thousands of employees. They have a very huge impact on society and these companies often take part in social activities that are part of it’s Corporate Social Responsibility campaigns.

So, they have to follow certain social norms and contribute to the development of society.

4. Greater Tax Burden in Certain Cases

As compared to other types of companies, incorporated companies have to pay a higher tax. An incorporated company does not get any discounts and any minimum taxable limits.

An incorporated company also has to pay income tax on the whole of its income at a fixed rate whereas other companies are charged at a gradual or slab rate.

5. Detailed Winding Up Procedure

The Companies Act provides for a detailed and lengthy process to explain the winding up of a company. This process is a lot more time consuming and expensive as compared to the same process for other types of companies.