Incorporation of company
Incorporation of a company refers to the legal procedure of forming a company. This process enables a company to have a corporate or legal personality and makes a company different from its shareholders and agents.
It makes a company recognized in the eyes of the law. The primary purpose is that the incorporation provides a legal status to the company. It also makes the members of the company represent their collective will. It also allows the company to have its rights and obligations.
This also helps a company to recognize the company globally and in a very effective way. It allows a company to take legal action on its own. That means a company can be sue or sued in its own name as it is a legal personality.
After gaining a corporate personality, the company can act as an individual entity and gain legal recognition.
Advantages of incorporation of company
Advantages of corporate personality or Advantages of incorporation of company are
- Independent identity: A corporate personality has an independent identity, which means that it is free from its agents, shareholders, employees and members. Such identity allows easy business, easy funds transfer, and easy management, as well as eases legal proceedings. And the company can hold property solely in its own name.
- Limited liability: one of the most important advantages of incorporation is that it provides for limited liability. It makes it more accessible for the shareholders and investors that their liability is extended only up to the part they have invested and not beyond that. None of them are liable beyond their investment, and hence, at the time of winding up, no liability arises on the shareholders and investors.
- Perpetual succession: The company is independent of its members and shareholders, and hence, it can exist for life long. For instance, in a company, the employees, directors, shareholders, and board members keep on changing, but the company does not change or dissolve. It keeps on continuing for perpetuity. This is how a company or organization keeps on working for hundreds of years.
- Transfer of shares: After the incorporation of a company, shares can be easily inherited and transferred to somebody. A company can always generate capital and finances through selling or sharing its shares.
- Separate assets and property: a company can have assets and property in its own name. The property can be registered in the name of the company. The company can have all rights over the property like some other legal person. In the case of Macaura v. Northern Assurance Co Ltd (1925) It was held that a company is the owner of the property and not its shareholders.
- To sue and be sued: a natural person can sue someone and be sued by someone; a company, being a legal personality, can also sue and be sued. The lawsuit will be registered by the name of a company, and the rights of the company will also be mentioned only, not its shareholders, members, or employers.
Disadvantages of incorporation of Company
Every face has two sides, and hence, the incorporation has advantages as well as disadvantages:
- These require more complex proceedings for the incorporation and for the limited liability. Getting a consensus and a common will is difficult sometimes.
- Not a natural person: some of the rights that can only be available to a natural person do not apply to the company because it is an artificial legal person.
- Because the shareholders, agents, and employees are all free from liability hence, the risk of fraud and scams keeps on increasing for a company.
Corporate veil
The incorporation can be called the corporate veil. It means that a company acts as a different legal personality with its shareholders, employees, and members, and hence, this acts as a veil between the company and its shareholders, and hence, this can be termed as a corporate veil. Due to this, a company keep in existence from year to year and is unaffected by the resignation of employees and their leaving the company. Hence, this corporate veil can be lifted many times.
This lifting of the corporate veil helps unveil the true nature of the company and keeps it safe from fraud and scams committed by its members or shareholders.
The concept came in the case of Solomon v. Solomon.
In lifting a corporate veil, the law looks behind the veil and does not give an advantage to the shareholders and the members of the company.
Section 34(2) of the Companies Act 2013 talks about the piercing or the lifting of the corporate veil.
In the case of Adams v. Cape Industries plc (1990), it was held that the corporate veil helps in differentiating between the members and the company as it is managed by natural persons only, and hence, it is very important to keep a check on their action so that their action does not become arbitrary.
