In this article the meaning of incorporation has explained in a broader sense. It also explains the advantages as well as disadvantages of incorporation.
Meaning of Incorporation
Incorporation however the legal process used to form a company or corporate entity. A company is a separate legal entity from its owners, with its own rights and obligations. Company can create in nearly all countries in the world and usually identified by the use of terms such as “Inc.” or “Limited” in their names.
The laws applicable for incorporating a company in India include the India Companies Act 2013, read with Companies (Central Governments) General Rules and Forms, the Indian Income Tax Act, and other laws & regulations. The previous law was India Companies Act of 1956.
The Foreign Exchange Management Act of 1999 is applicable for foreign investments and transactions.
Advantages of Incoroporation
Incorporation offers certain advantages to a company as compared with all other kinds of business organizations. They are as follows:-
Independent corporate existence
A company is a legal person. The important feature of a company is its independent corporate existence. After registration completed under the Companies Act, a company becomes vested with corporate personality, which is independent and distinct from its members.
Limitation of liability is another major advantage of incorporation. The company, being a separate entity, leading its own business life, the members are not liable for its debts. The liability of members hence limited by shares; each member however bound to pay the nominal value of shares held by them and his liability ends there.
An incorporated company never dies. Members may come and go, but the company will go on forever.
A company has no physical existence, it must act through its agents and all such contracts entered into by such agents must be under the seal of the company. The common seal acts as the official seal of the company.
Sec 82 gives expression to this principle by providing that “the shares or other interest of any member shall be movable property, transferable in the manner provided by the articles of the company.” When joint stock companies were established the great object was that the shares should be capable of being easily transferred.
The property of an incorporated company thus vested in the corporate body. The company is capable of holding and enjoying property in its own name. No members, not even all the members, can claim ownership of any asset of company’s assets.
Capacity for suits
A company can sue and sued in its own name. The names of managerial members need not pleaded.
A company is capable of attracting professional managers. It is due to the fact that being attached to the management of the company gives them the status of business or executive class.
Disadvantages of Incorporation
As Incorporation has marvelous advantages but not exempted from it’s disadvantages. The disadvantages of Incorporation is as follows:
Lifting of corporate veil
Though for all purposes of law a company thus regarded as a separate entity it sometimes seems necessary to look at the persons behind the corporate veil.
Determination of character
The House of Lords in Daimler Co Ltd. v. Continental Tyre and Rubber Co., held that a company though registered in England would assume an enemy character if the persons in de facto control of the company are residents of an enemy country.
For benefit of revenue
The separate existence of a company may disregard when the only purpose for which it appears to have formed concluded as the evasion of taxes. – Sir Dinshaw Maneckjee, Re / Commissioner of Income Tax v. Meenakshi Mills Ltd.
Fraud or improper conduct
In Gilford Motor Co v. Horne, a company restrained from acting when its principal shareholder thus bound by a restraint covenant and had incorporated a company only to escape the restraint.
Agency or Trust or Government company
The separate existence of a company may ignore when used as an agent or trustee. In State of UP v. Renusagar Power Co, it was held that a power generating unit created by a company for its exclusive supply was not regarded as a separate entity for the purpose of excise.
Under statutory provisions
The Act sometimes imposes personal liability on persons behind the veil in some instances like, where business is carried on beyond six months after the knowledge that the membership of company has gone below statutory minimum(sec 45), when contract is made by prescribing the name of the company(sec 147), when business is carried on only to defraud creditors(sec 542).
Formality and expense
Incorporation is a very expensive affair. It requires a number of formalities to complie with both as to the formation and administration of affairs.
Company not a citizen
In State Trading Corporation of India v. CTO, the SC held that a company though a legal person is not a citizen neither under the provisions of the Constitution nor under The Citizenship Act.
Sometimes contracts thus made on behalf of a company even before duly incorporated. However called as pre-incorporation contracts. Two consenting parties are necessary to a contract, whereas a company before incorporation is a non-entity.
Therefore, following are the effects of pre-incorporation contracts.
Company cannot be sued on pre-incorporation contracts
A company, when it comes into existence, cannot sued on pre-incorporation contracts. In English and Colonial Produce Co, Re, a solicitor on the request of promoters prepared a company’s documents and spent time and money in getting it registered but the company was not bound to pay for those services and expenses.
Company cannot sue on pre-incorporation contracts
A company cannot by adoption or ratification obtain the benefit of a contract made on its behalf before the company came into existence. In Natal Land and Colonization Co v. Pauline Colliery Syndicate, the promoters of a proposed company obtained an agreement from a landlord that he would grant lease of coal mining rights to the company. The company could not, after incorporation, enforce this contract.
Agents may incur personal liability
The agents who contract for a proposed company may sometimes incur personal liability. In Kelner v. Baxter, the promoters of a projected hotel company purchased wine from the plaintiff on behalf of the company. The company came into being but, before paying the price went into liquidation. Hence they were held personally liable to the plaintiff.
Ratification of a pre-incorporation contract
So far as the company is concerned it is neither bound by nor can have the benefit of a pre-incorporation contract. But this is subject to the provisions of the Specific Relief Act, 1963.
Section 15 of the Act provides that where the promoters of a company have made a contract before its incorporation for the purposes of the company, and if the contract is warranted by the terms of incorporation, the company may adopt and enforce it. In Vali Pattabhirama Rao v. Ramanuja Ginning and Rice Factory, a promoter of a company acquired a leasehold interest for it. He held it for sometime for a partnership firm, converted the firm into a company which adopted the lease. The lessor thus held bound to the company under the lease.
Section 19 of the Specific Relief Act provides that the other party can also enforce the contract if the company has adopted it after incorporation and the contract is within the terms of incorporation.
As soon as a company incorporated, whether public or private limited, it becomes a juristic person. It has its own name and property. However company is a separate legal entity distinct from its members who incorporate it.
A company does its business through its Directors. The directors also called the ears, eyes and hands of the company. The directors of a company are in fiduciary position. On the one hand they run the company as its owner (Policy maker) and on the other hand they are merely a servant of the company and take remuneration. Directors thus entitled to do any work on behalf of the company, what a company can do in ordinary course of business. There are certain items for which Board is not empowered to do. Such items thus done by the company in general meeting. Any action done by the directors in the ordinary course of business thus treated as complete work done by the Company. But wrong done by the Directors (criminal action ) are the responsibility of the Directors and not the responsibility of the Company.