Incorporation of a company refers to the process of legally forming a company or a corporate entity. Advantages of incorporation of a company are limited liability, transferable shares, perpetual succession, separate property, the capacity to sue, flexibility and autonomy. Incorporated businesses offer many more advantages over sole proprietorship companies or partnership companies. Let us explore the advantages of incorporation of a company in detail.
Advantages of Incorporation of a Company
An incorporated company is a legally recognised entity that exists separately from its owners and shareholders, which is different from partnership companies.
Section 34(2) of the Companies Act, 1956 states that from the date of the incorporation of the company, the subscribers to the memorandum and other members shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company and having perpetual succession and a common seat.
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The Companies Act provides that in event of a company being shut down, the members of the company are solely liable to contribute to the assets and liabilities of the company. It is in accordance with the Companies Act – Section 34(2).
However, in the case of companies that have been incorporated, none of its members is legally bound to contribute to anything more than the nominal value of shares held by the member which still remain unpaid.
The advantage of having limited liability for its members is one of the major reasons for setting up an incorporated company.
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As provided by the Companies Act Section 34(2), an incorporated company has the characteristic of perpetual succession.
In spite of any changes in members of the company, the company will be the same entity with the same privileges, immunities, estate, and possessions.
The death or insolvency of individual members does not affect the incorporated company in any way or form. The company will continue to exist indefinitely till the company is shut down.
As the Companies Act states, ‘Members may come and members may go, but the company can go on forever.’
Section 82 of the companies act states that ‘The shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.’
This leads to the investment of funds in shares. It is done so that members can members can encash shares at any given time upon their will.
It also serves the purpose of providing liquidity to the investors. They can sell shares, anytime they are willing to, on the open market or the stock exchange.
An incorporated company as a recognised legal entity is permitted to own its own funds and also other assets. ‘The property of the company is not the property of shareholders, it is the property of the company.’
‘The company is the real person in which the property is vested, and by which it is controlled, managed and disposed of.’ And thus, under the law, if a majority shareholder of the uses the company’s resources for personal reasons, he is liable to be held for criminal misappropriation of company funds.
Capacity to Sue
As a separate legal entity, an incorporated company has the right to sue other people in addition to companies. In turn, it can be sued by other companies and people.
However, the managing directors and other directors are not liable to be sued in the name of the company.
Flexibility and Autonomy
The company has an autonomy and independence to form its own policies and further, implement them. However, they are subject to the general principles of law, equity and a good conscience.
In accordance with the provisions that are mentioned in the Companies Act, Memorandum and Articles of Association.
Question for you
Mention any two advantages of incorporation for the shareholders of the company by the way of incorporating a company.
Answer – Two advantages of incorporation for shareholders of the company by way of incorporating a company are namely-
- Limited Liability
- Transferable Shares