Incorporation of a Company: Advantages and Disadvantages

Incorporation of a company can be understood as the process of starting the company. In India, the process of Incorporation of a company is governed by the Companies Act, 2013. Any company cannot start their business without incorporating the same with the help of the registrar of the company.

Key Takeaways:

• Only after the incorporation of a company, does it get the status of a legal entity and a separate identity.
• All the benefits that are available to a company will be only applicable after the incorporation of the company.
• The Corporate Identification Number (CIN), which is given to the company by the registrar of the company is a unique identity number for every company. This number is required by the company in doing their transactions, opening bank accounts, and registering themselves in different government schemes.

What is Incorporation of a Company?

The Registrar of the Company (RoC) provides every company with a Certificate of Incorporation after verifying all the details that are submitted for the Incorporation of the company. Section 7 of the Companies Act, 2013 provides a list of documents that are essentially required for the registration of a company. The Registrar of the Company (RoC) then enquires regarding the validity of these documents, and only after the satisfaction of the registrar, the company is issued the Certificate of Practice. The company must register the Article of Association and Memorandum of Association with the registrar of the company.

Advantages of Incorporation

1. Corporate Personality: After the company was incorporated following the provisions of the Companies Act, 2013, the company became an individual legal entity. The members of the company are separate from the company and a separate individual entity. Members and shareholders can be only part of the company, but their identity and the identity of the company are different. The company is self-sufficient in performing all the business transactions by themselves, they do not need any member of shareholder to do any transaction in their name for the company.

2. Limited Liability: The members of the company incorporated under the act have very limited liability. The liability of the members also varies according to the nature of the company. All the assets are owned by the company in their name only, and similarly, all the debts need to be paid by the company only. The members of the company are neither the owners of the assets of the company nor they can be held liable for any debts of the company.

3. Perpetual Succession: This feature of the company is self-explanatory from the term, and the simple meaning of the term is that the company formed under the act will never die. The company will always remain in business even if the members of the company leave the company or retire from the company, and even the death of a member of the company does not affect the continuity of the business. The members of the company can be replaced, and the work of the company will remain to continue. These things will not affect the identity of the company. The Companies Act, 2013 provides some sections in which the company can be legally winded up.

4. Transferable Shares: Shares of a company are the property of the company and they can be transferred. Articles of the company contain the rules on which these things can be executed. Any person who holds some share of the company can transfer the same to others or can sell the same on different platforms. The company generates capital by selling some amount of the shares to the general public. These trades are governed by different laws and the articles of the company.

5. Separate Property: The company formed as per the Companies Act, 2013 has a separate legal identity. So they can have their bank account and can acquire property in their name. The property of the company is their assets, and no member can claim their ownership on the property of the company. The company has its liabilities and debts that it needs to clear. There are some cases in which the director of the company uses the company assets, but that must be performed as per the articles of the company. If the director or any member misuses the company’s assets for personal use, then the director can be made liable for that.

6. Capacity to Sue: The Companies incorporated under the Companies Act, 2013 can sue the other person or any other company in their name as the company is a separate legal entity. The other companies have also the same right to sue the company. The directors cannot be sued for any act that is done by the company in their name.

7. Flexibility and Autonomy: The companies are registered entities and can make their own set of rules for the smooth functioning of their company. These policies must be given by the general principles of the Companies Act, 2013 and the articles. If the company forms any rules that are not valid, as per the laws or articles, then that cannot be accepted as company policy.

Disadvantages of Incorporation

1. Formalities and Expenses: A company is a large setup that requires several people to work. Even before the company starts its business and earns profit, there are multiple fees and expenses involved that make the whole process very expensive. The company has to pay the necessary fees to the registrar of the company to incorporate their company and file their articles of the company. It also involves various kinds of other expenses, such as the amount that the company gives to a lawyer to prepare all the documents, the amount the company gives to an accountant to maintain all their account, and the amount the company give to their CA/CS to file all their dues and keep an extra check on the company. All these are expenses, and in some cases, it is very hard for the company to bear these expenses in starting.

2. Corporate Disclosures: The companies have to follow the laws of the Companies Act, 2013 because they have to, from time to time, file various reports to the registrar of the company. These filings are very tedious work and require a workforce and special agents, who perform these tasks. The company has to also have various meetings by the act and its articles and file the report of these meetings to the registrar of the company.

3. Separation of Control from Ownership: The number of shareholders in a company is very large and shareholders who are a minority do not affect the decisions of the company. The number of employees in such a company is very large, and the small number of employees of the company does not affect the decisions of the company. So, the term ownership does not have any meaning in reality, and the employees do not have any ownership in the company.

4. Greater Social Responsibility: The companies have an obligation according to the Companies Act, 2013 to participate in corporate social responsibility. If the company is earning more than a certain amount of money in an annual year, then it is their obligation to do some social responsibility. The government made a mandate that these companies make some contribution to social causes.

5. Greater Tax Burden in certain cases: The company that gets incorporated as per the laws does not get any tax benefit from the government. The companies that do not get incorporated have the chance to avail some benefits from the government, and their tax rates are comparatively lower than the incorporated companies.

6. Detailed Winding up Procedures: This is also a major problem for the companies that they cannot close the company as and when they want. There is a proper process established by the law that they have to follow if they choose to wind up their company. It is a lengthy process and also requires a lot of money for the same.

Conclusion

After the Incorporation of a Company, it gets various rights that the company can enjoy and practice its business in the country in a smooth manner. The company gets the identity of a legal person and a jurist person. But any company cannot perform business without their directors and members. These people are the key personnel who do transactions for the company. They represent the company as per the laws and get business for the company.

Incorporation of a Company – FAQs

What is Incorporation of a company?

Incorporation of a company can be understood as the process of starting the company. In India, the process of Incorporation of a company is governed by the Companies Act, 2013.

What are the advantages of Incorporation of a Company?

Advantages include Corporate Personality, Limited Liability, Perpetual Succession, Transferable Shares, Separate Property, Capacity to Sue, Flexibility and Autonomy.

What are the disadvantages of Incorporation of a Company?

Disadvantages include Formalities and Expenses, Corporate Disclosures, Separation of Control from Ownership, Greater Social Responsibility, Greater Tax Burden in certain cases and Detailed Winding up Procedures.

What is a Corporate Identification Number (CIN)?

Corporate Identification Number (CIN), which is given to the company by the registrar of the company is a unique identity number for every company. This number is required by the company in doing their transactions, opening bank accounts, and registering themselves in different government schemes.

What is Corporate Disclosure?

The companies have to follow the laws of the Companies Act, 2013 because they have to, from time to time, file various reports to the registrar of the company, referred to as Corporate Disclosure.

Reference:

• Ministry of Corporate Affairs
• Institute of Company Secretaries of India

Note: The information provided is sourced from various websites and collected data; if discrepancies are identified, kindly reach out to us through comments for prompt correction.