The incorporation of a company is a pivotal milestone in the lifecycle of any business, marking its official transition from an informal venture into a recognized and regulated legal entity. This process involves formally registering the business with a state or national corporate registry (such as the Secretary of State in the U.S. or Companies House in the UK), under a specific piece of legislation (like the Companies Act). Upon successful incorporation, the business ceases to be merely an extension of its founders and becomes a "legal person" – an artificial juristic entity capable of owning property, entering into contracts, suing and being sued, and existing in perpetuity, independent of its owners' lifespans. The primary motivations for incorporation include establishing limited liability (protecting owners' personal assets from business debts), enhancing credibility with customers and partners, enabling easier access to capital through the sale of shares, and creating a clear tax structure. It is the definitive act of giving a business its own legal identity, setting the stage for structured management and scalable growth.
Advantages of Incorporation
1) 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.
2) Limited liability : The company, being a separate entity, leading it's own business life, the members are not liable for its debts. If the liability of members, as is usual, is limited by shares, each member is bound to pay the nominal value of the shares held by him and his liability ends there.
3) Perpetual succession : "An incorporated company never dies." The death or insolvency of members does not affect the continued existence of the company.
4) Transferable shares : When joint stock companies were established the great object was that the shares should be capable of being easily transferred. Section 44 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". The unique advantage of this is that member may sell his shares in the open market and get back his money, without affecting the capital structure of the company. The shares of a public company are freely transferable.
5) 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 member, not even all the members can claim ownership of any item of the company's assets. Thus, where a substantial shareholder insured the company's timber in his own name, he could not recover indemnity when the timber was burnt by fire as he had no insurance interest in the company's property.
6) A company can sue and can be sued in its corporate name.
7) A company attracts professional
management.
8) A company gets the privilege of collecting interest-free money from the public for its business by making a public issue or through private placement of shares and other
securities.
Disadvantages of Incorporation.
1. Lifting the corporate veil - All the above noted advantages of incorporation follow from the principle that for all purposes of law a company should be regarded as a separate entity from its shareholders. But sometimes it may become necessary to look at the persons behind the corporate veil and then some of those advantages disappear. The separate entity of the company is disregarded and the schemes and intentions of the persons behind are exposed to full view. They are made personally liable for using the company as a vehicle for undesirable purposes. This is usually done in the following cases:
(a) When it becomes necessary to determine the legal character of a corporation - Thus it has been held by the House of Lords in Daimler Co Ltd v. Continental Tyre & Rubber Co (Great Britain) Ltd that a company, though registered in England, would "assume an enemy character when persons in de facto control of its affairs, are resident in an enemy country or, wherever residents, are acting under the control of enemies." On the other hand, an American Court refused to hold that a company consisting of Negroes would become a black company.
(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. Benefits under excise law were denied to a company when it was found that it was a part of a group of three companies which were related not only in financial control but also through managerial personnel. They were intertwined in their management and operation. Their production had to be clubbed together so as to see whether it was within exemption limits. This principle is applied where the facts revealed that the companies (holding and subsidiary) are indulging in dubious methods of tax evasion.
(c) When company conceived and brought forth for fraudulent purposes - Thus a company was restrained from acting when its principal shareholder was found by a restraint convenient and had incorporated the company only to escape the covenant.
Case : Gilford Motor Co Ltd v. Horne, 1993 Ch 935 (CA).
(d) Agency or trust and Government Company - The separate existence of a company may be ignored where it is being used as an agent or trustee. The courts insist upon very strong evidence for this purpose. For example, a Government company is not regarded as an agent or trustee of the State unless it is performing sovereign functions as apposed to commercial functions. The property of a Government Company has been held to be not that of a State.
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 of the company and administration of its affairs.
3. Company is not citizen - Lastly, a company, though a legal person, is not a citizen. It can have the benefit of only such fundamental rights as are guaranteed to every "person" whether a citizen or not. A company does, however, have a nationality, domicile and residence. A company incorporated in a particular country has the nationality of that country, though, unlike a natural person, it cannot change its nationality.
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