Discuss the legal and practical advantage of incorporation
Answers
Answer:
Explanation:
Advantages of Incorporation of a Company
Creates a Separate Legal Entity: This states that a company is independent and separate from its members, and the members cannot be held liable for the acts of the company, even when a particular member owns majority of shares. This was held in the case of Salomon v Salomon & Co. Ltd. (1897) AC 22. Salomon transferred his business of boot making, initially run as a sole proprietorship, to a company (Salomon Ltd.), incorporated with members comprising of himself and his family. The price for such transfer was paid to Salomon by way of shares, and debentures having a floating charge (security against debt) on the assets of the company. Later, when the company’s business failed and it went into liquidation, Salomon’s right of recovery (secured through floating charge) against the debentures stood prior to the claims of unsecured creditors, who would, thus, have recovered nothing from the liquidation proceeds. The claims of certain unsecured creditors in the liquidation process of Salomon Ltd., where Salomon was the majority shareholder, was sought to be made personally liable for the company’s debt. Hence, the issue was whether, regardless of the separate legal identity of a company, a shareholder/controller could be held liable for its debt, over and above the capital contribution, so as to expose such member to unlimited personal liability. The House of Lords held that, as the company was duly incorporated, it is an independent person with its rights and liabilities appropriate to itself, thus, making Salomon & Co. Ltd liable, and not Salomon.
Company has Perpetual Succession: The term 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 has no effect on the existence of the company. The company only comes to an end, when it is wound up according to law, as per the provisions of the Companies Act, 2013. Re Noel Tedman Holdings Pty Ltd (1967) Qd R 56 stated that a companies members may come and go but this does not affect the legal personality of the company
Can own Separate Property: Since a company is termed as a separate legal entity in the eyes of law, it can hold property in its own name and the members cannot claim to be the owner of the companies property(s). The Supreme Court, in the case of Bacha F. Guzdar v CIT Bombay stated that a company being a legal person, in which all its property is vested and by which it is controlled, managed and disposed of a member cannot, ensure the companies property on its own name. In Macaura v. Northern Assurance Co. Ltd., a shareholder of a timber company, held all shares of the company but one. He also insured the timber (asset of the company) on his own name, which was destroyed in fire. When he sought compensation, it was held that they were not liable to pay any money to the shareholder, in lieu of the timber since he did not own the timber and that timber, which the company owned was not insured.
Capacity to sue and be sued: The company has the capacity of suing a person or being sued by another person in its own name. A company, though can be sued or sue in its own name, it has to be represented by a natural person and any complaint which is not represented by a natural person is liable to be dismissed in the same way in which an individual complaint is liable to be dismissed in the absence of the complainant.
Easier access to Capital: Raising capital is easier for a corporation, since a corporation can issue shares of stock. This may make it easier for your business to grow and develop. If the in the market for a bank loan, that’s another reason to incorporate, since n most cases, banks prefer and easily lend money to incorporated business ventures.
.