Disadvantages of Incorporation

There are many disadvantages of Incorporation which business owners should know: Formalities and Expenses, Corporate Disclosure, Separation of control from ownership, Greater Social, Responsibility, Greater Tax Burden in Certain Cases, Detailed Winding Up Procedure. Let us discuss them in detail.

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Disadvantages of Incorporation

• Formalities and Expenses
• Corporate Disclosure
• Separation of control from ownership
• Greater Social Responsibility
• Greater Tax Burden in Certain Cases
• Detailed Winding Up Procedure

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.

Other businesses do not have to follow as many provisions and rules as an incorporated company.

(source – latest law news)

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.

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.

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 CSR(corporate social responsibility) campaigns.

Because of the colossal impact these huge incorporated companies have, they have to follow certain social norms and contribute to the development of society.

 

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.

Thus, many companies often start out as private companies or partnership companies. And so, when their scale of grows larger, they become an incorporated company.

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.

Question for you

Which of among following disadvantages of incorporation mean the following – “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.” 

1. Tax Burden 

2. Social Responsibility 

3.Corporate disclosures 

4. Formalities and expenses

Answer – 3. Corporate Disclosures