DD: Company Law III - Incorporation

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The concept of incorporation involves giving a commercial entity a separate legal personality. In the eyes of the law, a company is considered an individual entity with its own agency, ability to own property, and generally conduct itself in matters of business as though it were a human person. 

Advantages of incorporation

  1. Corporate personality: A partnership firm has no existence aside from that of its members, but a company is a distinct legal or juristic person independent of its members.
  2. Limited Liability: In a partnership, each partner is liable to the full extent of their assets for the debts of the partnership. In the case of companies limited by shares, no member is bound to contribute anything more than the nominal value of the shares held by him which remains unpaid. 
  3. Perpetual Succession: The existence or continuity of the company isn't affected by the death or insolvency of individual members.
  4. Transferable Shares: The shares or other interest of any member in a company is movable property, transferable according to what is provided by the articles of the company. - S. 44, Companies Act, 2013.
  5. Separate Property: The company as a legal entity is capable of owning its own funds and other assets, and the property of the company isn't the property of the shareholders. - Gramophone & Typewriter Co. vs. Stanley, [(1906) 2 KB 856, at 869].
  6. Capacity to Sue: Since it is a juristic legal person, a company can sue in its name and be sued by others. 
  7. Flexibility and Autonomy: The Key Managerial Personnel can carry on the business activities with freedom, authority and accountability in accordance with the Company Law.
    1. Chief Executive Officer
    2. Company Secretary 
    3. Whole-time director
    4. Chief Financial Officer 
    5. Other officer as may be prescribed.
Disadvantages of Incorporation
  1. Formalities and expenses: The legal formalities involved are complex and cumbersome.
  2. Corporate disclosures: Members of a company have comparatively restricted accessibility to internal management and day to day administration of corporate working.
  3. Separation of control from ownership: Especially in bigger companies, where the number of members are far too high, members cannot exercise effective control over the company's working. 
  4. Greater social responsibility: Companies are called upon to show greater social responsibility in their working, and are subject to greater control and regulation than that by which forms of business organization are governed and regulated. 
  5. Greater tax burden in certain cases: A company is liable to tax without any minimum taxable limit as is prescribed in the cases of registered partnership firms and others. Also, it has to pay income tax on the whole of its income at a flat rate whereas others are taxed on graduated slab system. Tax implications may therefore have a crucial bearing on decisions of business organization.
  6. Detailed winding up procedure: The procedure provided for in the Companies Act is more expensive and time consuming than that which is applicable to other forms of business organization.
Lifting or Piercing of the Veil: This concept refers to exceptions provided to the concept of separate legal personality of the company, and limited liability of its members. Even though the corporation has a distinct personality under law, it remains in reality an association of persons who are the beneficial owners of the property of the body corporate.
As the separate personality of the company is a statutory privilege, it must be used for legitimate business purposes only.  Where fraudulent or dishonest use is made of the legal entity, the individuals concerned won't be allowed to take shelter behind the corporate personality. The court will then break through the corporate shell and apply the concept of lifting or piercing of the corporate veil - taking action as though no entity exists separate from the members. Members or controlling persons will be thus made liable for debts and obligations of the company. 

For example, it can be lifted when in defence proceedings, an entity relies on its corporate personality as a shield to cover its wrongdoings, like tax evasion. - BSN (UK) Ltd. vs. Janardan Mohandas Rajan Pillai [1996] 86 Comp Cas 371 (Bom).

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