Introduction :

Before starting a new business venture, its very essential to know advantages of incorporation of a company like, limited liability, transferable shares, perpetual succession, flexibility, etc. Incorporated businesses offer many more advantages over sole proprietorship companies or partnership companies. Following are different advantages of forming a company.

1. Separate Legal Existence. ( Corporate personality) :

The outstanding feature of a company is its independent corporate existence. A company before the law is a person. It is regarded as an entity separate from its members. By incorporation under the Act, the company is vested with a corporate personality which is distinct from the members who compose it. No one can say that he is the owner of the company. Now the business belongs to an institution. Thus a company continues to exist even if the members go on changing from time to time.

In the landmark decision of Salomon v Salomon (1897), it was held that a company has a corporate personality which is distinct from its members or subscribers. A single shareholder may virtually (अक्षरशः) hold the entire share capital of the company; even in such a case, the company does not lose its identity. It was declared that the business belonged to the company and not to a single shareholder or number of shareholders and neither of them is liable to indemnify the company for its debts.

2. Perpetual succession

An incorporated company never dies, except when it is wound up as per law. A company, being a separate legal person is unaffected by death or departure of any member and it remains the same entity, despite total change in the membership.

For understanding this point more clearly let’s assume M, N, and O are the only members of a company, holding all its shares. Their shares may be transferred to or inherited by P, Q, or R who may, therefore, become the new members and members of the company as they are now the shareholders of the company. But the company will remain the same entity, with same name, privileges and immunities, property and assets.

In the case of PNB v. Lakshmi Industrial & Trading Co. (P) Ltd.(2001), it was held by the Allahabad High court that, persons giving guarantee for co’s loan could not claim to be relieved of liability because the co’s management had totally changed including MD. Such changes does not effect the comtinuity of the co., or its commercial and contractual relations.

Perpetual succession means that membership of a company may keep on changing from time to time, but that does not affect the companies continuity.

3. Limited Liability of Members :

“The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organization.”

A corporate form of business is far superior to- and much safer than that of a partnership firm as far as the monetary risk factor is concerned. A partner of a firm is personally liable for all the liabilities of the firm to an unlimited extent.

A company having its separate legal entity is the owner of its own assets and bound by its liabilities.

Members are neither the owner nor liable for its debts.

All the debts of a company are to be paid by itself rather than by its members. Members liability becomes limited or restricted to the nominal value of the shares taken by them in a company.

In other words, a shareholder is liable to pay the balance, if any due on the shares held by him, when called upon to pay and nothing more, even if the liabilities of the company far exceed its assets. This means that, the liability of a member is limited.

For example, if A holds shares of the total nominal value of Rs. 1,000 and has already paid Rs. 500/- as part payment at the time of allotment, he cannot be called upon to pay more than Rs. 500/-. If he holds fully-paid shares, he has no further liability to pay even if the company is declared insolvent.

No member is bound to contribute anything more than the nominal value of the shares held by them or guarantee given by them in case of winding up of the company.

Exceptions to the principle of limited liability : Incorporation by furnishing false information.  

According to section 7(7), (b) of the Act, tribunal may on an application made to it in regards to any fraudulent or false information being furnished by a company during its incorporation and on being satisfied with the same, direct that liability of the members of such company shall be unlimited.

·         Fraudulent conduct of business.

Under section 339(1), during the course of winding up a company if it appears that any business of a company is carried on with the intent to defraud creditors of the company or any other persons, the tribunal may on the application of the Official Liquidator or the Company Liquidator or any other creditor on being satisfied declare that any person who is or has been a director, manager or officer of the company or any other person knowing part of aforesaid business shall be personally responsible, without any limitation of liability.

·         Unlimited company.

When the company is incorporated under section 3(2)(c)  of the Act as an unlimited company. Then as the name clearly suggests that the liability of its members will be unlimited.

·         Misleading prospectus.

As per section 35(3) companies act, where it is proved that a prospectus is issued with an intention to defraud or mislead an applicant for securities of a company or any other person for any fraudulent purpose, then every person who was a director at the time of issuance of  such prospectus or has been named as director in the prospectus shall be personally responsible without any limitation of liability for all and any of the losses or damages.

·         Acceptance of deposit with a fraudulent intention.

As per section 75(1), when a company fails to repay the deposit or part thereof or any interest referred under section 74 within specified time and it is proved that deposit is accepted with the intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible acceptance of those deposits shall be liable of all or any of the losses or damages that may have been incurred by depositors.

Actions to be taken in pursuance of inspector‘s report.

Section 224(5) : Where the report made by an inspector states that fraud has taken place in a company and due to such fraud any director, key managerial personnel, other officer of the company or any other person or entity, has taken undue advantage or benefit, whether in the form of any asset, property or cash or in any other manner, the Central Government may file an application before the Tribunal for appropriate orders with regard to disgorgement (a situation in which a person or organization is forced to pay back money that they have made in an illegal way) of such asset, property, or cash, as the case may be, and also for holding such director, key managerial personnel, officer or other person liable personally without any limitation of liability.

4. Transferability of shares :-

The capital of a company is divided into parts, called shares.

Section 44 companies act of the Act, declares that “the shares or debentures or any other interest of any member in a company shall be a movable property that can be transferred in the manner provided in the article of the company.”

(Articles of Association is a document containing all the rules and regulations that governs the company.)Thus incorporation of a company allows its member to sell their shares in an open market and to get back his investment without any hassle of withdrawing money from the company. This unique feature of incorporation provides liquidity to the investor and stability to the company. On the other hand in a partnership firm partners can’t sell their share in an open market except with unanimous consent of all the partners.

5. Capacity to sue and be sued :-

Being a body corporate company possesses individual capacity being sued and suing others in its own name. A company’s right to sue arises when some loss is caused to the company i.e. to property or personality of the company. A company also has a right to sue whenever any defamatory material published about it that may affect its business.

The criminal complaint can be filed by a company but it must be represented by a natural person. Not necessarily be represented throughout by the same person but the absence of such representative may result in dismissal of the complaint. Similarly, any default on the part of the company can be sued by the victim on the name of the company only.

6. Contractual Rights :-

A Company, can enter into contracts for the conduct of the business in its own name. A shareholder can not enforce a contract made by his company; he is neither a party to the contract, nor be entitled to the benefit derived from it as a company is not a trusty for its shareholders.

7. Common Seal :-

Though a company has an artificial personality, it acts through human beings, who are called as directors. They act as agents to the company but not to its members. All the acts of the company are authorized by its “common seal”. The “common seal” is the official signature of the company. A document not bearing the common seal of the company will not be binding on the company.

8. Separate property :-

A company being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name. The corporate property is clearly distinguished from the members’ property and members have no direct proprietary rights to the company’s property 

It was held in R.F. Perumal v. H. John Deavin that, “no member can claim himself to be the owner of the company’s property during its existence or in its winding-up”.

9. Separate Management :-

The members may derive profits without being burdened with the management of the Company. They elect their representatives as Directors on the Board of Directors of the company to conduct corporate functions through managerial personnel employed by them.

10. Voluntary Association for Profit :-

A company is a voluntary association foor profit. It is formed for the accomplishment of some stated goals and whatsoever profit is gained is divided among its shareholders or saved for the future expansion of the company.

11. Termination of Existence :-

A company, being an artificial juridical person, does not die a natural death. Generally, the existence of a company is terminated by means of winding up. However, to avoid winding up, sometimes, companies adopt strategies like reorganisation, reconstruction and amalgamation.

12. Artificial person

A Company is an artificial person created by law. It is not a human being but it acts through human beings. It is considered as a legal person which can enter into contracts, possess properties in its own name, sue and can be sued by others etc. It is called an artificial person since it is invisible, intangible, existing only in the contemplation of law. It is capable of enjoying rights and being subject to duties.

Company is not a citizen: The company, though a legal person, is not a citizen under the Citizenship Act, 1955 or the Constitution of India. A company can act only through natural persons. Nevertheless, it is to be noted that certain fundamental rights enshrined in the Constitution for protection of “person”, e.g., right to equality (Article 14) etc. are also available to company. Section 2(f) of Citizenship Act, 1955 expressly excludes a company or association or body of individuals from citizenship.

To sum up,

“ A company is a voluntary association for profit with capital divisible into transferable shares with limited liability, having a distinct corporate entity with perpetual succession “.