Company Incorporation: Necessity and advantage

What is company incorporation?

The word incorporation in common parlance means the process of constituting a company, or other organization as a legal corporation. Incorporating a company in India involves complying with the rules provided in the Companies Act 2013. 

Although ensuring legal compliance involves a great deal of effort, the advantages of incorporating a company are far more.

Benefits of Company Incorporation.

• Capacity to Raise Capital

Capital is the money needed to produce goods and services. A company has two methods of obtaining capital: equity; which means raising funds through the public, and debt; referring to bank loans or other forms of credit. When a company is incorporated, it is considered more reliable, hence it shall be easy to obtain capital.

• Separate Legal Entity

A company is a separate legal entity to the following stakeholders

• Promoters: People who initiated the company setup
• Directors: People who control the company and manage its business
• Shareholders: People who own the company

The hallmark of this concept is that:

• The Company can buy/sell/own property in its own name
• The company can sue and be sued in its name

In the recent past, the Companies Act 2013 has permitted the setting up of a new class of companies which is known as a Person Company. This structure has provided the ‘separate entity’ benefit to an individual which was not available under the erstwhile sole proprietorship form of business. Due to this change, the sole proprietor also enjoys limited liability.

• Limited Liability

Members are legally bound to pay only to the extent of their undischarged liability. In the case of a company limited by shares, it is limited to the amount unpaid on their shares. While in a company limited by guarantee the liability shall be only the amount the members have agreed to guarantee. 

• Tax Benefits

Another benefit of incorporating your business, and one of the most crucial to leverage, are the many tax deductions that are available to incorporated businesses. There are numerous deductions at your disposal that are not available to individuals. At present, the tax rate is 25.17%. For New manufacturing companies, the tax rate is reduced from 25% to 17% effectively which is much lower than other body corporate.

• Perpetual Succession

Perpetual succession means continuous existence, which means that a company never dies, even if the members cease to exist. The membership of a company changes from time to time, but that does not affect the existence of the company. The company only comes to an end, when it is ended up as indicated by law, according to the provisions of the Companies Act, 2013.

• Transferability of  Shares

Shares are considered at par with a movable property and hence transferable easily from one person to another. This aspect provides liquidity to the shareholders. Members are in a position to encash the shares at any time as they will. In a public limited company, the shares can be transferred freely. Whereas, in a private limited company, the share transfer is not frequent due to it being closely-held, but is not prohibited.

The incorporation of the company has many other advantages too. It is governed under the companies act and is a larger entity than a partnership. The advantages are not just limited to its incorporation. It also helps it to grow faster as compared to a partnership or any other corporation or entity. The banks and other organizations have more faith in a company than any other corporation.

Hence it is said that if one wants to go to a joint business, then one must go to company business. As we can see that most of the billionaires in India and the world are of companies and are not of partnership or any other formation. A company prevails over other formations.