In general usage, the term “incorporation” refers to the process of forming a legal corporation out of a company, city, or other entity. In order to form a business in India, rules set forth in the Companies Act of 2013 must be followed. Although establishing legal compliance takes a lot of time and effort, the advantages of incorporation of a company are significantly greater.
Advantages of Incorporation of company
- Advantages of Incorporation of company
- Aids in the generation of capital
- Separate entity
- Limited liability
- Transferability of shares
- The double E’s – Expertise and Efficiency
- Perpetual succession is guaranteed
- What are the Misconceptions around Company Incorporation?
- Incorporation means no personal liability
- Insurmountable paperwork for compliance
- Companies pay a higher tax rate.
- Exorbitant expenses
- Minimum turnover criterion
- Disadvantages of incorporation
- More frequent maintenance
- Double taxation is a possibility.
- Absence of personal tax credits
- Dissolution difficulty
Following are the advantages of incorporation:
Aids in the generation of capital
The money required to generate goods and services is referred to as capital. A firm can get money in two ways: equity, which refers to acquiring funds from the public, and debt, which refers to bank loans or other forms of credit. When a company is incorporated, it is seen as more trustworthy, making it easier to borrow finance.
The SEBI and other related rules require the company to be incorporated in order to raise funds in the form of equity. Furthermore, if funds are raised from the general public rather than a private group, the company must meet the requirements of a public company and be listed on a recognised stock exchange.
To the following stakeholders, a company is a separate legal entity:
Promoters: People who initiated the company setup
Directors are the people in charge of the firm and its operations.
Shareholders are the company’s owners.
The following are the defining characteristics of this concept:
- The corporation has the ability to acquire, sell, and own real estate.
- The corporation has the ability to sue and be sued in its own name.
The Companies Act of 2013 recently allowed for the formation of a new type of company known as a one-person corporation. This structure has offered an individual with the ‘separate entity’ benefit that was previously unavailable under the sole proprietorship business structure. The lone proprietor now has restricted liability as a result of this modification.
Members are only obligated to pay up to the amount of their unpaid debt. If a firm is limited by shares, its liability is limited to the amount of unpaid shares. In a business limited by guarantee, the members’ liability is restricted to the sum they have agreed to guarantee.
A member could not have discharged his liability, as observed mostly in the case of closely-held firms (private companies). In this instance, he will be requested to pay his debts when the company is closed down. This is one of an advantages of incorporation to the members since, unlike a sole proprietorship or a partnership, their liability is limited.
Shares are treated as movable property and can thus be easily transferred from one person to another. This feature offers stockholders with liquidity. Members have the option of cashing out their shares at any time. The shares of a public limited business can be freely transferred.
The double E’s – Expertise and Efficiency
Because the management and ownership of the firm are separate, specialists in the field can be assigned to each of the company’s functions. As a result, accountability improves. Because of the abundance of resources, it is possible to offer competitive wage packages and recruit the best people available.
Perpetual succession is guaranteed
A company can survive for decades (or even centuries) after its creator (or founders) have passed away. While the membership can change at any time, it has no effect on the organization’s existence as a whole, which is not the case with other legal ownership forms.
What are the Misconceptions around Company Incorporation?
Incorporation means no personal liability
Although the concept of a separate legal entity exists, it does not totally exempt the owners from liabilities. The owner, for example, may have authorised a transaction in the company’s name by signing it in his own name, or may have guaranteed a loan in his own, or it may have committed fraud. He will be held personally accountable in such circumstances.
Insurmountable paperwork for compliance
Too frequently, people are intimidated by the amount of paperwork and documentation that comes with forming a business. However, the incorporation procedure has been streamlined, and the job may be accomplished swiftly and effectively with the help of the right expertise.
Companies pay a higher tax rate.
People have a prevalent misunderstanding that forming a business in another structure, such as a partnership or limited liability company, can minimise their tax liability. This is not the case because all businesses, whether partnerships or corporations, are taxed at a rate of 30%. In reality, certain businesses with a turnover below a specified threshold must pay a lower rate of income tax.
Incorporation used to be expensive, but that is no longer the case. Professionals’ fees have decreased significantly as a result of the competitive climate. Customers benefit from the convenience and affordability of numerous online registration options. The Income Tax Act of 1961 additionally allows for the amortisation of pre-incorporation expenses by providing a deduction of one-fifth of the expense for each of the prior five years.
Minimum turnover criterion
A company is similar to any other type of business organisation in that it can be founded from scratch and there is no requirement for a minimum turnover to be incorporated as a corporation.
The buzzword these days is entrepreneurship, and while picking a company model, an entrepreneur must consider the numerous benefits and dangers associated. An effective business form goes a long way toward determining the company’s future. Incorporating a firm as a corporation provides significantly more security and legitimacy than alternative business structures.
Disadvantages of incorporation
There are some advantages of incorporation and certain disadvantages. These are some of the disadvantages:
Unfortunately, incorporation is not inexpensive, and starting a business in this manner can be costly. While the exact amount for incorporation will vary depending on the country in which your business is based, you can anticipate to pay a number of administrative and legal expenses. You’ll also need to account for the costs of hiring outside legal counsel to ensure the process proceeds properly, which can be quite costly in and of itself.
More frequent maintenance
Apart from the increased financial expenditures of running a business, there is also the necessity to adhere to strict legal and accounting regulations. All management conferences, board meetings, and shareholder meetings must be documented, and all documentation and financial accounts must be updated and submitted accurately on a regular basis. This frequently necessitates the appointment of accountants, attorneys, or other specialists, which adds to the cost. Failure to adhere to established regulatory requirements at all times can harm an organization’s reputation and result in financial or legal repercussions.
Double taxation is a possibility.
There is a risk of double taxation depending on the sort of corporation your company is classed as. This typically occurs because the company is required to file tax returns on its earnings as well as any dividends given to shareholders.
Absence of personal tax credits
Depending on their region, single proprietorships may be eligible for a variety of tax credits. This does not apply to corporations, which are required to pay tax on every amount earned. Furthermore, unlike a sole proprietorship or a partnership or corporate losses cannot be deducted from your personal income. In a corporation, you may be able to roll losses forward or backward in order to reduce the company’s income in those years.
If it is decided that the corporation should no longer exist for any reason, the dissolution process can be lengthy and time-consuming. It can be costly to see the entire process through, and the company’s final tax returns must also be completed in compliance with the law.