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Benefits of Company Incorporation
(i) Corporate personality
By incorporation under the Companies Act, 1956 the company is vested with a corporate personality quite distinct from individuals who are its members. Being a separate legal entity it bears its own name and acts under a corporate name. It has a seal of its own. Its assets are separate and distinct from those of its members. It is also a different 'person' from the members who compose it. As such it is capable of owning property, incurring debts, borrowing money, having a bank account, employing" people, entering into contracts and suing or being sued in the same manner as an individual. Its members are its owners but they can be its creditors simultaneously as it has a separate legal entity. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The shareholders are not the agents of the company and so they cannot bind it by their acts. The company does not hold its property as an agent or trustee for its members and they cannot sue to enforce its rights, nor can they be sued in respect of its liabilities. Thus, ‘Incorporation' is the act of forming a legal corporation as a juristic person. A juristic person is in law also conferred with rights and obligations and is dealt with in accordance with law.
(ii) Limited Liability
"The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organization." Limited liability means the status of being legally responsible only to a limited amount for debt of a company. This means that the liability of a member is limited. For example, if A holds shares of the total nominal value of Rs. 1,000 and has already paid Rs. 5001- (or 50% of the value) as part payment at the time of allotment, he cannot be called upon to pay more than Rs. 5001-, the amount remaining unpaid on his shares. If he holds fully paid shares, he has no further liability to pay even if the company is declared insolvent. In the case of a company limited by guarantee, the liability of members is limited to a specified amount mentioned in the memorandum. In the case of unincorporated associations like partnership firms, the liability of the partners for the debts of the business is unlimited. Not only may their share in the firm but their personal assets be attached to satisfy the debts and liability of the firm. Section 25 of the Indian Partnership Act, 1932, for example, lays down that "every partner, is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is partner."
(iii) Transferability of Shares
The capital of a company is divided into parts, called shares. The shares are said to be movable property and, subject to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to a company. When the joint stock companies were established, the object was that their shares should be capable of being easily transferred.
(iv) Contractual Rights
A company, being a separate legal entity different from its members, can enter into contracts for the conduct of the business in its own name. A shareholder cannot enforce a contract made by his company; he is neither a party to the contract nor entitled to the benefit of it, as a company is not a trustee for its shareholders. Likewise, a shareholder cannot be sued on contracts made by his company. The distinction between a company and its members is not confined to the rules of privity; however, it permeates the whole law of contract. Thus, if a director fails to disclose a breach of his duties to his company, and in consequence a shareholder is induced to enter into a contract with the director which he would not have entered into had there been disclosure, the shareholder cannot rescind the contract.
Similarly, a member of a company cannot sue in respect of torts committed against it, nor can he be sued for torts committed by the company. Therefore, the company as a legal person can take action to enforce its legal rights or be sued for breach of its legal duties. Its rights and duties are distinct from those of its constituent members.
(V) Limitation of Action
A company cannot go beyond the power stated in the Memorandum of Association. The Memorandum of Association of the company regulates the powers and fixes the objects of the company and provides the edifice upon which the entire super-structure of the company rests. The actions and objects of the company are limited within the scope of its Memorandum of Association. In order to enable it to carry out its actions without such restrictions and limitations in most cases, sufficient powers are granted in the Memorandum of Association. But once the powers have been laid down, it cannot go beyond these powers unless the Memorandum of Association is itself altered prior to doing so.
(vi) Common Seal
On incorporation, a company acquires legal entity with perpetual succession and a common seal. Since the company has no physical existence, it must act through its agents and all such contracts entered into by its agents must be under the seal of the company. The common seal of the company is of very great importance. It acts as the official signature of a company. The name of the company must be engraved on its common seal. A rubber stamp does not serve the purpose. A document not bearing common seal of the company is not authentic and has no legal force behind it. The person authorised to use the seal should ensure that it is kept under his personal custody and is used very carefully because any deed, instrument or a document to which seal is improperly or fraudulently affixed will involve the company in legal action and litigation.
(vii) Capacity to Sue and Be Sued
A company being a body corporate can sue and be sued in its own name. To sue, means to institute legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings against the company are to be instituted in its own name. Similarly, the company may bring an action against anyone in its own name. A company's right to sue arises when some loss is caused to the company, i.e. to the A company has a right to seek damages where a defamatory material published about it, affects its business.
Type of Companies
“Private Company” means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital.
(a) restricts the right to transfer its shares,
(b) limits the number of its members to fifty
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;
It’s Benefits: Private companies are exempted from complying with quite a few provisions of the Companies Act, 1956
“Public Company” means a company which—
(a) is not a private company;
(b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed;
(c) is a private company which is a subsidiary of a company which is not a private company.
Formation of Companies Important Steps:
1. Decide upon the type of Company to be incorporated i.e. Private or Public Company
2. Apply for a Director Identification Number (DIN)
3. Acquire and Register Digital Signature Certificate.
4. Incorporate a Company:-
Apply for the name of the company to be registered by filing Form1A for the same. After that depending upon the proposed company type file required incorporation forms listed below.
Form 1 : Application or declaration for incorporation of a company
Form 18 : Notice of situation or change of situation of registered office
Form 32 : Particulars of appointment of managing director, directors, manager and secretary.
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