A company is a legal entity which is formed by a group of people to run a different kind of business, in other words, it is a voluntary association of persons formed for undertaking some big business activity and each such member will contribute some amount for a common purpose. The money so contributed constitutes the capital of the company. The capital of the company is divided into small units called shares, since members invest their money by purchasing the shares of the company, they are known as shareholders of the company. It is established by the law and can be dissolved by law. The definition of a company is provided by Section 2 (20) of the Companies Act, 2013.
There are different types of companies for instance private companies (Section 2(68) of the Act), public companies (Section 2(71) of the Act), one-person companies (Section 2(62) of the Act), foreign companies, subsidiary companies (Section 2(87), Act), and holding companies, all these types of companies are based on their liability, members, public interest, and control.
What is the incorporation of a company?
The very meaning of incorporation is the inclusion of something as part of a whole, then the incorporation of a company which means constituting a company or any other organization as a legal corporation. It makes a company a legal person. According to legal regulations, there is no mandatory provision or an obligation to incorporate every company that comes into existence, however, just to enjoy certain benefits/advantages it is recommended to incorporate a company. There will be certain name changes of the company if it undergoes incorporation.
Example: ABC Private Limited, XYZ Limited.
Both above-mentioned examples indicate that both companies are incorporated under the legal regulations, but in a different way which means ABC Pvt. Ltd. is incorporated as a private company, whereas XYZ Ltd is incorporated as a public company.
Based on the number of members and the public interest companies are further categorized into
- Private company
- Public company
- Private company
- Which means a company has a minimum paid-up share capital, and it is prohibited from issuing shares to the public or transferring shares.
- Minimum two persons are required to form this type of company and maximum is fifty persons.
- These companies must write “Private Limited” after their names.
- Public company
- According to legal regulations, a company that is not a private company is called a public company.
- Minimum seven persons are required to form a public company and the maximum is unlimited.
- It can offer shares to the general public.
- It must use the word “Limited” as part of its name.
Why incorporate a company?
Despite there being no obligation or any mandatory provision to incorporate every company, there are certain benefits to the incorporated company. So, just to enjoy certain legal benefits companies are incorporated.
What are the key features of incorporating a company?
- The incorporation describes the way how a company was legally formed and came into existence.
- Incorporation involves drafting and writing up the Article of Incorporation and also identifying the shareholders.
Benefits of incorporating a company
The following are the advantages of incorporating a company.
- Limited liability: Shareholders of a company are liable only to the extent of the face value of shares held by them. Their private property cannot be attached to pay the debts of the company. Thus, the risk is limited and known. This encourages people to invest their money in corporate securities.
Example: if A buys 5 shares in a company ‘XYZ’, each share value is Rs. 1000, then he will be liable only for 5000 and not beyond that.
- Large financial resources: The company form of organisation enables to mobilise huge financial resources because of the principle of limited liabilities and diffusion of ownership. It collects funds in the form of shares of small denominations so that people with small means can also buy them. The benefits of limited liability and the transferability of shares attract investors.
- Continuity of existence: A company is an artificial person created by law and possesses independent legal status. It is not affected by the death, insolvency, etc of its members. Thus, it has perpetual existence.
Example: if A is a promoter or a shareholder of a company ‘XYZ’, now, if A dies then the company ‘XYZ’ will not dissolve and it will be continued by other promoters or shareholders.
- Benefits of large-scale operation: This is the only form of business organisation that can provide capital for large-scale operations. It results in large-scale production consequently leading to an increase in efficiency and reduction in the cost of operation. It further opens the scope for expansion.
- Liquidity: The transferability of shares acts as an added incentive to investors. The shares of a public company can be traded easily in the stock exchange. The public can buy shares when they have money. Prospective investors can invest and convert shares into cash whenever they need money.
- Professional management: Companies, because of their complex nature of activities and a large volume of business, require professional managers at every level of their operation. This leads to efficiency in the management of their business affairs.
- Research and development: A company generally invests a lot of money on research and development for improved processes of production, designing and innovating new products, improving quality of product, new ways of training its staff, etc.
- Tax benefits: Although the companies are required to pay tax at a high rate, in effect, their tax burden is as low as they enjoy many tax exemptions under Income Tax Act.
Disadvantages of incorporating a company
Along with the advantages in incorporating a company, there are some disadvantages too, they are:
- Too many legal formalities: The formation of a company is a time-consuming process and also expensive. Many legal formalities have to be observed and several legal documents have to be prepared and filed. Delay in the formation may deprive the business of the momentum of an early start.
- Lack of motivation: The directors and other officers of a company have little personal involvement in the efficient management of a company. The separation between ownership and control and the absence of a direct link between effort and reward may lead to a lack of personal interest and incentive. It is difficult to keep a personal touch with all the customers and employees. As a result, the efficiency of business operations may be low.
- Delay in decisions: Red Tapism and bureaucratic hurdles do not permit quick decisions and prompt action in the company form of organisation. There is little scope for personal initiative and a sense of responsibility. Paid employees like to play safe and tend to shift responsibility. There is a lack of flexibility of operations in a company.
- Excessive Government control: At every stage in the management of a company, there are legal rules and regulations. Several legal provisions have to be followed and reports have to be filed. Such legal interference in day-to-day operations results in a lack of secrecy. A lot of time and money is spent complying with statutory requirements.
- Unhealthy speculation: The shares of a public company are dealt in on a stock exchange. The prices of these shares fluctuate depending upon the financial health, dividends, prospects, and reputation of the company. Directors of a company may indulge in speculation based on inside information for private gain. Company organisation may also lead to concentration of economic power in a few hands.
- Conflict of interests: Company is the only form of business wherein a permanent conflict of interests may exist. In a company, conflicts may continue between shareholders and board of directors or between shareholders and creditors, or between management and workers.
- Lack of secrecy: Under the Companies Act, a company is required to disclose and publish a variety of information on its work. Widespread publicity of affairs makes it almost impossible for the company to retain its business secrets. The accounts of a public company are open for inspection to the public.
What to do to incorporate your company?
Before starting with the incorporation procedure you have to keep some general or basic documents handy so that there will be no last-minute rush.
Some general documents
- Identification proof of all the directors and shareholders (ex: Pan Card, Aadhar Card, Passport, Driving license).
- Address proof of all the directors and shareholders of a company (Ex: Bank account statement, any utility bills, Ration Card).
- Director Identification Number (DIN),
- Digital Signature Certificate (DSC) of a director or partner,
- Designated partner Identification Number (DPIN) in case of LLP registration.
- Passport size photographs.
- Registered office address proof:
- NOC form from the owner of the premises for using that address as a registered office address,
- Any utility bill in the name of the owner with his/her signature.
- Form DIR-2 (signed by directors of the company), consent to act as Director.