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Short Note on Advantages and Disadvantages of Incorporation of a Company.

Explain the Advantages and Disadvantages of Incorporation of a Company.

Introduction
     A company, in common parlance, means a group of persons associated together for the attainment of a common end, social or economic. It has “no strictly technical or legal meaning.”
     According to sec. 3 (1) (ii) of the Companies Act, 1956 a company means a company formed and registered under the Companies Act, 1956 or any of the preceding Acts. Thus, a Company comes into existence only by registration under the Act, which can be termed as incorporation.
A company is a separate legal entity which is formed when the registrar of companies issues a certificate of incorporation. In order to obtain a certificate of incorporation one or more persons needs to have supplied the registrar of companies with a memorandum of association and all other necessary documents like: Memorandum of association, Articles of association, Application Form, Company names, List of shareholders etc
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Take note:  A company comes into existence when a number of persons come together with a view to exploit some business opportunity. These persons are called promoters. Under section 12, any seven or more persons may form an incorporated company for a lawful purpose by subscribing their names to the memorandum of association and complying with other requirements in respect of registration. Such an incorporated company may be a company
a) Limited by shares,
b) Limited by guarantee, or
c) An unlimited company.
The application for registration of a company should be presented to the registrar of the state in which the business office of the company is to be situated. The application shall be accompanied by the following documents.
1. The memorandum of association.
2. The articles of association, if any, duly signed by the subscribers of the memorandum.
3. A statement of the nominal capital and where it exceeds 25 lakhs, a certificate from the controller of capital issues, permitting the issue of capital. This certificate is not required under the companies Act 1956, but under the Capital Issues Control Act 1947.
4. A notice of address of the registered office of the company. This may be done within 30 days of registration if it cannot be filed at the time of registration.
5. A list of directors and their consent to act signed by each.
6. An undertaking in writing signed by each such director to take and pay for their qualification shares.
7. A declaration that all the requirements of the act have been complied with. Such a declaration may be signed by an advocate of the supreme court or high court, an attorney or pleader entitled to appear before a high court, a chartered accountant practicing in India who is engaged in the formation of the company, or by a person named in the articles as director, manager or secretary of the company.
Items number 5 and 6 are not required to be filed in the case of a private company.
If the registrar is satisfied that all the requisite documents delivered to him are in order, he shall register the memorandum and the articles, if any, provided he is satisfied on the following point:
(a) The relevant provisions of the act have been complied with.
(b) The objects of the company are lawful.
(c) The requisite number of persons required under the act have subscribed and duly signed.
(d) The memorandum and the articles comply in all respects with the provisions of the act.
(e) The name selected by the company is acceptable.
(f) The statutory declaration has been properly made.
If the registrar of companies is satisfied that all the aforesaid requirements have been complied with, he will register the company and place its name on the register of companies. It is clear that once the statutory requirements have been complied with, the registrar has no option but to register it. On refusal to register on improper grounds, he may be compelled by a writ of mandamus.
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Certificate of incorporation :

On registration the registrar will issue a certificate of incorporation whereby he certifies that the company is incorporated and in the case of a limited company, that the company is limited. From the date of incorporation mentioned in the certificate, the company becomes a legal person separate from its shareholders. The legal effect of incorporation is as under:
1. A company becomes a body corporate distinct from its members. It becomes a legal person and not a mere aggregate of the shareholders. Thus, where all the members of a company were killed by a bomb the company was deemed to survive.
2. A company has a perpetual succession and a common seal it is an immortal being.
3. A company can sue and be sued in its own name.
4. A company has a right to hold and alienate its own property. The property of the company belongs to the company itself and not to the individual members.
5. Company’s debts and obligations are the liabilities of the company only and cannot be enforced against the individual shareholders.

Conclusiveness of the certificate of incorporation :

The certificate of incorporation shall be conclusive evidence that-
i) All the requirements of the act have been complied with in respect of registration;
ii) All the pre-conditions of registration have been complied with;
iii) The company is duly registered, and
iv) That the company came into existence on the date of the certificate.
The certificate of incorporation prevents the re-opening of matters prior to the registration and essential to it. It places the existence of the company as a legal person beyond doubt. Consequently, even if the seven signatures to a memorandum were written by one person or were all forged, the certificate would be conclusive that the company was duly registered. Similarly, if the signatories were all infants, the certificate would still be conclusive.
Advantages of incorporation

     Incorporation offers certain advantages to a company as compared with all other kinds of business organizations. They are

1)      Independent corporate existence- the outstanding feature of a company is its independent corporate existence. By registration under the Companies Act, a company becomes vested with corporate personality, which is independent of, and distinct from its members. A company is a legal person. The decision of the House of Lords in Salomon v. Salomon & Co. Ltd. (1897 AC 22) is an authority on this principle:

     One Salomon incorporated a company to take over his personal business of manufacturing shoes and boots. The seven subscribers to the memorandum were all his family members, each taking only one share. The Board of Directors composed of S as managing director and his four sons. The business was transferred to the company at 40,000 pounds. S took 20,000 shares of 1 pound each n debentures worth 10,000 pounds. Within a year the company came to be wound up and the state if affairs was like this: Assets- 6,000 pounds; Liabilities- Debenture creditors-10,000 pounds, Unsecured creditors- 7,000 pounds.
     It was argued on behalf of the unsecured creditors that, though the co was incorporated, it never had an independent existence. It was S himself trading under another name, but the House of Lords held Salomon & Co. Ltd. must be regarded as a separate person from salomon.

2)      Limited liability- 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 is limited by shares; each member is bound to pay the nominal value of shares held by them and his liability ends there.

3)      Perpetual succession- An incorporated company never dies. Members may come and go, but the company will go on forever. During the war all the members of a private company, while in general meeting, were killed by a bomb. But the company survived, not even a hydrogen bomb could have destroyed it (K/9 Meat Supplies (Guildford) Ltd., Re, 1966 (3) All E.R. 320).

4)      Common seal- Since 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.

5)      Transferable shares- when joint stock companies were established the great object was that the shares should be capable of being easily transferred. 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.”

6)      Separate property- The property of an incorporated company is 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.

7)        Capacity for suits- A company can sue and be sued in its own name. The names of managerial members need not be imp-leaded.

8)      Professional management- 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.Mute2

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 DinshawManeckjee, 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. 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.

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.

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