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The term company, as per the Companies Act, 2013, under section 2(20), is defined as “a company incorporated under the Companies Act 2013 or any previous company law.”

A company is artificial person, in that since it is created by a process of law not by natural birth and it is not a natural person like human. But on the other hand, it is clothed with many of the right of a natural person.

A company cannot take Decision on its own, it has to act through a board of directors elected by shareholders. In Bates v. Standard land Co (1910 2CH. 408 at p.416.) that ‘Board of directors are the brain and the only brains of the company, which is the body and the company can and does act only through them’.

Like a natural person it cannot take oath, cannot appear in its own person in the case, cannot be sent to jail. But the company has right to acquire and dispose of the property, to enter into contract with stranger and can sue and be sued in its own name.

Advantages of Incorporation of a Company

Incorporating of a company brings many advantages like a company can own property, it can sue and be sued, it has a Separate legal entity from its members, etc.

1.Separate legal entity

A company is a legal person having a Juristic personality entirely distinct from and independent of its members. (Kathiawar Industries Ltd. C.G. of Evacuee Property A.I.R (1966) Punj.337)

It means that the creditor of the company can sue only the company to recover their debt not the members. Similarly, the company is not liable in any way for the individual debts of its members.

With the incorporation of the company, the company is separated or a separate new person is born in the eyes of law, now for every liability incurred by company, company will be responsible but the member.

Now the company has right to own and transfer the title of the property, way it likes. No member or person can claim joint ownership of the company property. It can be sued and can sue in its own name.

Separate legal entity of the company is also recognized by the Income Tax Act, where a company is required to pay Income Tax on its profits and when these profits are distributed to shareholders in the form of dividend, the shareholders have to pay income tax on their dividend income. This proves that a company and its shareholders are two separate entities.

2.Perpetual existence/ succession

A company has a perpetual succession and is independent of the life of its members. The life of a company does not depend upon the death, insolvency or retirement of any or exit of any shareholder.

Perpetual succession thus means that in spite of any change in the membership of the company, the existence of the company is not affected. Since the company is created by law, only law alone can dissolve it.

3.Common seal

A company being an artificial person cannot sign a document for itself. It cannot act on itself; it acts through the natural person (directors or board of directors).

But having legal entity it can be bound by those documents which bears its Signature; therefore, law has provided the provision of using Common Seal with the name of the company engraved on it, is used as substitute for its Signature.

No document issued by company will be binding on it without the presence of common seal on it.

4.Limited liability

One of the important advantages of a company is that the liability of it is limited to the amount unpaid on their shares, howsoever heavy losses the company might have suffered, members are liable to the unpaid amount. However, the Act doesn’t prevent the companies from making liability on their member unlimited, but such company are rare in existence.

5.Separate Property

A company being a legal person can hold, purchase and sell property in its own name. A member of the company doesn’t have direct light in the ownership of the property acquired by the company. The property of a company should be used for the purpose of the company not for the personal use of its member or directors.

6.Capacity to sue and being sued

With the existence of the company, the company acquire right to sue any person or get sued by any person on the breach of its legal duties.

7.Ease in control and management

The company law provides for the management of joint stock companies through directors (collectively known as board of directors); therefore, the shareholders don’t have to worry about their money.

Disadvantage of Incorporation of company

1.Loss of Privacy

A public company has to publish all its accounts, capital structure, changes in assets, minutes of meeting, interest of directors, MOA, AOA with Registrar.

2. Wastage and in efficiency in management

Incorporation enables a large number of persons to join hands as member in a joint stock company, all of whom cannot possibly take active part in the management of the company and as a result wastage and inefficiently management.

3. Double taxation

Double taxation occurs when the company is taxed on their profit and secondly to shareholder when they receive dividend.

4. Loss of ownership

In individual Business, the ownership is with one person but once Incorporated the ownership dissolve, one person doesn’t have complete ownership (public company)

5. Hard to dissolve

A company being artificial person, whose existence is ensured by the law. The law can only dissolve it, dissolving of a company Incorporated required to follow legal formalities and it is quite expensive.


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