The corporate personality and the nature and advantages of a company can best be understood by looking at its following characteristic features.
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. The decision of the House of Lords in Salomon v. Salomon & Co Lts is a well-Known authority of this principle: One S incorporated a company to take over his personal business of manufacturing boots and shoes. The seven subscribers to the memorandum were all the members of his own family, each taking only one share. The Company's Board of Directors was composed of S, as the managing director, and his four sons. Through this Board, S's business was transferred to the company at an agreed price in payment of which S was allotted 20,000 shares of $1 each and debentures worth $10,000 creating a charge on the company's assets. Within a year the company came to be wound up and the state of affairs was like this: Assets: $6000; Liabilities: (1) debenture creditors $10,000, (2) ordinary creditors $7000. It was argued on behalf of the unsecured creditors that, though incorporated under the Act, the company never had an independent existence. It was S himself trading under another name. But the House of Lords held that salomon & Co must be regarded as a separate person from S. "When the memorandum is duly signed and registered, the subscribers are a body corporate capable forthwith of exercising all the functions of an incorporated individual. It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing the bulk of its capital to one person. The company is at law a different person altogether from the subscribers of the memorandum.
2. Limited liability - Limitation of liability is another major advantage of incorporation. The company, being a separate entity, leading its own business life, the member 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. Perpectual succession - "An incorporated company never dies." In the words of Professor Gower: "Members may come and go, but the company can go on for ever. 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".
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 insurable interest in the company's property.
6. A company can sue and be sued in its corporate name
7. A company attracts profession 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
1. Lifting of 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 residents 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 reveal that the companies (holding and subsidiary) are indulging in dubious methods for tax evasion.
(c) When company conceived and brought forth for fraudulent purposes - Thus a company was restrained from acting when its principle shareholder was bound be a restraint covenant and had incorporated the company only to escape the covenant.
(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 opposed to commercial functions. The property of a Government Company has been held to be not that of State.
(e) Under statutory provisions - Besides this, the Act itself imposes personal liability in certain cases upon persons clothed behind the corporation. For example, where a contract is made by misdescribing the name of the company [S. 12]; or the business is carried on only to defraud creditors [S. 339]; members or officers who are parties to such transactions are personally liable. Under Section138 read with Section 141, Negotiable Instruments Act, 1881, directors, etc, of a company can be held criminally liable for dishonour of the company's cheque. The company can also be punished for it under attribution of directors's intent to it. A company cannot escape criminal liability only because there is a provision for punishment by way of imprisonment and fine. If there is mens rea on the part of the acting director, it becomes attributable to the company. A company is not capable of suffering mental agony and hardship. It can only suffer financial losses.
A holding company means a company which has the power to control the composition of another company's Board of Directors or holds a majority of its shares. Such a controlled company is known as a "subsidiary". Ordinarily even a 100 percent subsidiary and its holding company are regarded as two separate legal entities. But under the force of certain statutory provisions such companies have to present a joint picture of their accounts and financial position. [S. 129] Where the holding company controls the whole conduct of its subsidiary, it may incur liability for such conduct.
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.
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 of not. A company does, however, have 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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