DISADVANTAGES OF INCORPORATION: 1.
Lifting of corporate veil- though for all purposes of law a company is regarded as a separate entity it is sometimes necessary to look at the persons behind the corporate veil. a) 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. b) For benefit of revenue- The separate existence of a company may be disregarded when the only purpose for which it appears to have been formed is the evasion of taxes. Sir Dinshaw Maneckjee, Re / Commissioner of Income Tax v. Meenakshi Mills Ltd. c) Fraud or improper conduct- In Gilford Motor Co v. Horne, a company was restrained from acting when its principal shareholder was bound by a restraint covenant and had incorporated a company only to escape the restraint. d) Agency or Trust or Government company- The separate existence of a company may be ignored when it is being used as an agent or trustee. InState 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. e) 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 misdescribing the name of the company(sec 147), when business is carried on only to defraud creditors(sec 542).
2) Formality and expense- Incorporation is a very expensive affair. It requires a number of formalities to be complied with both as to the formation and administration of affairs. 3) 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.
4) Double Taxation: Once incorporated, earnings are subject to double taxation, whereby, company profits are taxed, and then the dividends paid to shareholders from the "net" profits are also taxed. With a non-incorporated business, the income the owner receives from the business is only taxed once. Double taxation can be avoided if the corporation is registered as an "S-Corporation" 5) Statutory Compliance Costs: Compliance with legal and accounting requirements places a significant burden on companies in terms of staffing, cost and time. There are also fees associated with the initial company incorporation, and ongoing operations. 6) Loss of flexibility: The separate legal entity status of incorporation also means that the company finances are separate from the individual's, therefore the individual cannot "borrow" money from the accounts of the corporation, and statutory requirements in general reduce the flexibility of what can and can't be done with the business and its finances.
