ADVANTAGES AND DISADVANTAGES OF INCORPORATION
INCORPORATION OF COMPANY
Incorporation is done by getting the company registered with the Registrar of Companies. The required fee for registration is paid and the certificate of Registration is obtained from the Registrar of Companies. The company becomes an entity only after it is registered. It is, therefore, said that ‘floatation is the conception of a company whereas its incorporation is its birth when it takes on the form of an artificial person. So long as a company is not incorporated, it cannot be called a ‘company’ from the legal viewpoint and it has not entity as such.
ADVANTAGES OF INCORPORATION OF COMPANY
Following are the advantages of incorporation:
Aids in the generation of capital
The money required to generate goods and services is referred to as capital. A firm can get money in two ways: equity, which refers to acquiring funds from the public, and debt, which refers to bank loans or other forms of credit. When a company is incorporated, it is seen as more trustworthy, making it easier to borrow finance.
The SEBI and other related rules require the company to be incorporated in order to raise funds in the form of equity. Furthermore, if funds are raised from the general public rather than a private group, the company must meet the requirements of a public company and be listed on a recognised stock exchange.
Separate entity
To the following stakeholders, a company is a separate legal entity:
- Promoters: People who initiated the company setup
- Directors are the people in charge of the firm and its operations.
- Shareholders are the company’s owners.
The following are the defining characteristics of this concept:
- The corporation has the ability to acquire, sell, and own real estate.
- The corporation has the ability to sue and be sued in its own name.
The Companies Act of 2013 recently allowed for the formation of a new type of company known as a one-person corporation. This structure has offered an individual with the ‘separate entity’ benefit that was previously unavailable under the sole proprietorship business structure. The lone proprietor now has restricted liability as a result of this modification.
Limited liability
Members are only obligated to pay up to the amount of their unpaid debt. If a firm is limited by shares, its liability is limited to the amount of unpaid shares. In a business limited by guarantee, the members’ liability is restricted to the sum they have agreed to guarantee.
A member could not have discharged his liability, as observed mostly in the case of closely-held firms (private companies). In this instance, he will be requested to pay his debts when the company is closed down. This is one of advantages of incorporation to the members since, unlike a sole proprietorship or a partnership, their liability is limited.
Transferability of shares
Shares are treated as movable property and can thus be easily transferred from one person to another. This feature offers stockholders with liquidity. Members have the option of cashing out their shares at any time. The shares of a public limited business can be freely transferred.
The double E’s – Expertise and Efficiency
Because the management and ownership of the firm are separate, specialists in the field can be assigned to each of the company’s functions. As a result, accountability improves. Because of the abundance of resources, it is possible to offer competitive wage packages and recruit the best people available.
Perpetual succession is guaranteed
A company can survive for decades (or even centuries) after its creator (or founders) have passed away. While the membership can change at any time, it has no effect on the organization’s existence as a whole, which is not the case with other legal ownership forms.
DISADVANTAGES OF INCORPORATION OF COMPANY
There are some advantages of incorporation and certain disadvantages. These are some of the disadvantages:
Expensive
Unfortunately, incorporation is not inexpensive, and starting a business in this manner can be costly. While the exact amount for incorporation will vary depending on the country in which your business is based, you can anticipate to pay a number of administrative and legal expenses. You’ll also need to account for the costs of hiring outside legal counsel to ensure the process proceeds properly, which can be quite costly in and of itself.
More frequent maintenance
Apart from the increased financial expenditures of running a business, there is also the necessity to adhere to strict legal and accounting regulations. All management conferences, board meetings, and shareholder meetings must be documented, and all documentation and financial accounts must be updated and submitted accurately on a regular basis. This frequently necessitates the appointment of accountants, attorneys, or other specialists, which adds to the cost. Failure to adhere to established regulatory requirements at all times can harm an organization’s reputation and result in financial or legal repercussions.
Double taxation is a possibility.
There is a risk of double taxation depending on the sort of corporation your company is classed as. This typically occurs because the company is required to file tax returns on its earnings as well as any dividends given to shareholders.
Absence of personal tax credits
Depending on their region, single proprietorships may be eligible for a variety of tax credits. This does not apply to corporations, which are required to pay tax on every amount earned. Furthermore, unlike a sole proprietorship or a partnership or corporate losses cannot be deducted from your personal income. In a corporation, you may be able to roll losses forward or backward in order to reduce the company’s income in those years.
Dissolution difficulty
If it is decided that the corporation should no longer exist for any reason, the dissolution process can be lengthy and time-consuming. It can be costly to see the entire process through, and the company’s final tax returns must also be completed in compliance with the law.
