Disadvantages of Incorporation
Know about the procedure of Incorporation of a Company. Learn the advantages and disadvantages of Incorporation.
Izhar Ahmad26 Dec, 2023
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Company incorporation is registering a business with the state as a separate legal entity. Shareholders often own the corporate entity in even a single-member company and are subject to control by a board of directors.
Limited Liability is a clear segregation between the corporation's assets and financial activities and those of the corporation owner and investors. However, it should be noted that incorporation is not a prerequisite to operating a business. Business owners can choose to run their businesses as partnerships or sole proprietorships.What is a Company?
In its most basic form, "company" denotes a group of individuals collaborating to achieve a common objective. As per Section 2(20) of the Companies Act 2013, a company is described as "an entity incorporated under the Companies Act 2013 or any preceding company legislation." This definition primarily underscores the formal registration and establishment of the entity, omitting an in-depth exploration of its meaning, nature, and attributes. Consequently, the legal definition of a company can be summarized as follows: A company is any association governed by the Companies Act, 2013 or any prior Companies Act. Contrary to popular belief, it is not a fictional entity; once registered, it attains the status of a legal person in the eyes of the law, endowed with equivalent rights and responsibilities as an actual person.Process for Incorporation of a Company
The incorporation of a company generally steps mentioned below:- Checking the names' availability
- Preparing the articles of incorporation and their draft
- Memoranda, autographs, postage, prints, and article reviews
- Power of Attorney
- Filed Documents for the Registrar of Companies
- E-Form Statutory Declaration
- Payment of Registration Charges
- The incorporation certificate
Disadvantages of Incorporation
There are a few disadvantages of incorporation of a company in India which are mentioned below:Financial Burden:
The initial expenses of company registration in India encompass filing fees, potential legal and accounting costs, and the option of hiring a service for paperwork completion. Additionally, ongoing fees are obligatory for maintaining the company's status.Double Taxation Risk:
Certain corporate structures, such as a Corporation, may be susceptible to "double taxation," where the business is taxed twice—first on profits and then on dividends distributed to shareholders.Refusal of Certain Fundamental Rights:
Article 14 of the Constitution provides everyone access to basic provisions, whereas Article 19 provides protection to Indian citizens. Even with nationality, domicile, and place of residence, a company does not have the right to request enforcement of fundamental rights which are only given to the national citizens of the country. However, a company’s nationality does not depend on the nationality of its stockholders.Reduced Personal Control:
In the case of a stock corporation, individual control diminishes as a board of directors, elected by shareholders, assumes authority over the corporation.Mandatory Compliance:
Establishing a corporation requires strict adherence to state regulations, encompassing organizational structure, operational requisites, and accounting procedures.Continuous Documentation:
Most corporations are obligated to submit annual reports on financial status. Ongoing paperwork includes tax returns, accounting records, meeting minutes, and various licenses and permits essential for business operation.Perpetual Existence Challenges:
While perpetual existence is an advantage, dissolving a corporation demands considerable time and financial resources.Corporate Veil Concerns:
The "Corporate Veil" is a concept that separates the corporation from its individuals. However, courts may lift this veil in certain situations to unveil the true nature of the corporation, especially when there is a suspicion of misuse or abuse of the corporate structure.Looking for the Best Commerce Coaching?
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Advantages of Incorporation of a Company
Despite of many disadvantages of Incorporation of a Company, there are many advantages too which are mentioned below:Company Enjoys Perpetual Succession:
Perpetual succession denotes the ongoing existence of an organization, indicating that it persists even after the departure of its members. As outlined in the Companies Act of 2013, the presence or absence of members has no impact on the legal identity of the company. The corporation only ceases to exist when it undergoes legal dissolution.Distinct Legal Entity:
This concept asserts that even when a specific member holds a majority of a business's shares, the company operates independently and is separate from its members. The key question revolves around whether a shareholder or controller can be held personally responsible for the company's debts beyond their capital contribution, regardless of the company's distinct legal identity.Capacity to Initiate and Face Legal Actions:
The company possesses the legal authority to initiate legal actions or be subject to legal proceedings. Although a company can be a party to legal actions in its own name, representation by a natural person is a prerequisite. Any legal claim lacking representation by a natural person is liable to dismissal, akin to an individual complaint when the complainant is absent during the process of Company Registration in India.Ownership of Separate Property Permitted:
Given its recognition as a distinct legal entity, a corporation is authorized to own property in its own name, and members cannot lay claim to its ownership. Additionally, he personally insured the company's lumber assets, which were unfortunately lost in a fire.Capital Formation:
Corporations benefit from simplified access to capital as they can issue stock instead of relying on debt. Another motivating factor for incorporation, such as when seeking a bank loan, lies in the fact that banks generally prefer and find it more convenient to extend financial support to incorporated businesses.Disadvantages of Incorporation FAQs
What are the stages of incorporation of a company?
There are generally these stages in incorporation of a company – Planning and preparation, naming and legal structure, filing and paperwork, and compliance and legal formalities.
What is the first step in the incorporation process?
An application must be submitted with the Registrar of Companies in order to register and incorporate a company.
Is registration and incorporation the same thing?
The key difference is that incorporation establishes a separate legal entity.
Is incorporation a legal form?
It is the legal procedure of separating a business company from its owners.
What is a certificate of incorporation?
A certificate of incorporation is a legal document/license issued with regard with the formation of a company or corporation
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