Introduction
The term company, in its general sense, can be defined as a group of
persons, associated together to achieve some common objective. In its
legal sense, the term company, as per the Companies Act, 2013, under
section 2(20), is defined as “a company incorporated under the
Companies Act 2013 or any previous company law.”
Any association, under the Companies Act, 2013 or any previous
Companies Act shall be termed as a company.
1. The misconception that it is a fictitious person is not true. It in reality is
an artificial or a legal person, recognised by law, once it is registered
and it owes similar rights and duties that a natural person has.
2. In V Javali v Mahajan Borewell, it was held that a company can be
held liable for a statutory violation like an individual, but it cannot be
imprisoned. Thus, any violation, as stated under the Companies Act
attracts penalty and not imprisonment of the company.
Advantages of Incorporation of a Company.
1. Establishment of a Separate Legal Entity
Incorporating a company creates a distinct and independent legal
entity. Members of the company cannot be held personally responsible
for the company’s actions, even if one member owns a majority of the
shares. This principle was established in the case of Salomon v
Salomon & Co. Ltd. (1897) AC 22. Solomon, a bootmaker, transferred
his sole proprietorship business to a newly formed company (Salomon
Ltd.).
Although Salomon and his family constituted the majority of the
members, the company operated as a separate legal entity. When the
company faced financial challenges and went into liquidation,
Salomon’s personal liability was limited to his capital contribution and
he was not held responsible for the company’s debts.
2. Perpetual Succession
Incorporated companies enjoy perpetual succession, meaning they
continue to exist regardless of changes in membership. The company
persists until legally wound up according to the provisions of
the Companies Act, 2013.
As highlighted in Re Noel Tedman Holdings Pty Ltd (1967) Qd R
56, changes in company membership do not impact its legal standing,
emphasising that the company remains unaffected by the comings and
goings of its members.
3. Ownership of Separate Property
As a separate legal entity, a company can hold property in its own
name and members do not have individual claims to the company’s
assets. The Supreme Court, in Bacha F. Guzdar v CIT Bombay,
affirmed that since the company is a distinct legal person, members
cannot claim ownership of the company’s property in their individual
capacity.
Additionally, the case of Macaura v. Northern Assurance Co.
Ltd. illustrated that a shareholder cannot insure company-owned
assets in their personal name, emphasising the separation of personal
and company property.
4. Capacity to Sue and Be Sued
An incorporated company has the legal capacity to initiate legal
actions or defend itself in its own name. However, for such legal
proceedings, representation by a natural person is necessary. Failure
to comply with this requirement may lead to the dismissal of a case,
similar to the dismissal of an individual complaint in the absence of the
complainant.
5. Enhanced Access to Capital
Incorporation facilitates easier access to capital for a business.
Corporations can issue shares of stock, providing a convenient means
to raise capital. This ease of capital raising becomes particularly
advantageous when seeking bank loans, as banks generally prefer
lending to incorporated businesses.
Therefore, incorporation not only fosters business growth but also
increases the likelihood of securing financing from financial
institutions.
Conclusion
The decision to incorporate a company involves weighing both
advantages and disadvantages of incorporation. On the positive side,
incorporation provides legal protection, perpetual existence, property
ownership, enhanced legal capacity and improved access to capital.
However, the drawbacks include initial and ongoing costs, the potential
for double taxation, loss of individual control, strict structural
requirements, continuous paperwork and challenges in the dissolution
process.
