A company is a business form used by entrepreneurs for their business, and it is registered under the governing law. For example, in India, a company is registered under the Companies Act, 2013, which governs matters related to the company. There are many conditions to be fulfilled to get it registered. When all the conditions are fulfilled, the company gets registered, and when a company is registered under the Companies Act, it has many advantages and disadvantages.
Registering a company brings advantages such as separate legal identity, perpetual succession, limited liability, transfer of shares, capacity to sue, common seal, etc., but it also brings disadvantages such as complexity, transparency, cost, responsibility, etc. Note that the advantages and disadvantages of company registration may vary from case to case.
Note: The term “registration” and “incorporation” means the same thing.
Table of Contents
Advantages of the Company
Following are the advantages of the company:
1. Separate Legal Entity:
A separate legal entity is the biggest advantage of a company, as under this, the company gets separated from its owner and becomes a separate legal entity. In other words, when a business is registered as a company, the business gets a separate legal identity in the eyes of the law and becomes a separate legal artificial person eligible to carry on business in its own name.
2. Perpetual Succession:
Perpetual succession means continuity, according to which members come and go, but the company continues and does not come to an end unless it is wound up. This feature helps in keeping the business running continuously, as the change of members does not affect it. In other words, if a member transfers his share to someone else or a member is not in a position to work, the company does not get wound up.
3. Limited Liability:
Members of a company enjoy limited liability facility, which means the member is liable only up to their shares or guarantee, but this facility is not provided in an unlimited company. This facility protects the member from unlimited liability and also protects personal assets, but if the corporate veil is lifted and the member is found guilty, then the liability of the member becomes unlimited.
4. Transferability of Shares:
Transfer of shares in a company is permitted, but in some types of companies it is restricted, i.e., permission of the board of directors is required or depends on the governing law. Transfer of shares in a public company is permitted without any restriction, but in a private company, it is restricted. Restrictions on share transfer help maintain confidentiality and private control.
5. Ability to Sue:
The company is a legal person and has all the rights, including the right to sue, which means the company has the ability to sue anyone in its own name. This facility is provided to the business due to a separate legal entity because when the business is registered as a company, the governing law provides a separate legal identity, with the help of which the business can do anything in its own name.
6. Easy Access to Capital:
The company has the right to issue its shares to the public and raise capital. This helps the business to obtain capital to run the business and expand, and obtaining a loan for a company is easier than in other types of business forms. Note: Issuing shares without approval is prohibited in some types of companies.
7. Capacity of Ownership:
The company has ownership capacity, which means that the company buys and holds everything in its own name. This is possible due to a separate legal entity because when the business is registered as a company, the law provides it with a separate legal identity, making it a separate artificial person that gets the right to acquire ownership capacity.
Disadvantages of the Company
Following are the disadvantages of the company:
1. Complex:
Registering, running, and closing (winding up) a company is more complex than other types of business forms, as there are many legal documents and procedures to be followed to register, run, and close a company under the Company Law, and there are also many internal processes that are quite complex.
2. Expensive:
There are a lot of legal and functional tasks to be performed in a company, which require more money to perform, which is why forming, operating, and winding up a company is more expensive than other forms. In other words, preparing documents, maintaining books, appointing people to various positions such as directors, auditors, legal advisors, etc., conducting audits, etc., is a costly task.
3. Transparency:
All the businesses registered under the company law are required to maintain transparency of their work and data, such as publishing their financial data publicly etc. which can be considered as the biggest disadvantage for the company as this data can be fatal for the company and non-compliance with the norms set by the governing law can lead to fines or other consequences.
4. Responsibility:
Various responsibilities, such as corporate social responsibility, etc., are imposed on companies by governing law, which are mandatory for companies to fulfill. These responsibilities cost companies a lot of money, and failure to fulfill them can lead to fines or other legal consequences. Note: These responsibilities apply only if the company meets the criteria set by the governing law.
5. Loss of Control:
All the managerial functions in the company are performed by the Board of Directors, and the members only attend the Annual General Meeting (AGM), Extraordinary General Meeting (EGM), etc., and they are not involved in the managerial functions, due to which they lose their control over the managerial functions. Note: This is not applicable to a One Person Company, as only one person acts as both a member and a director.
Note: Not all the advantages and disadvantages of company registration are mentioned above.
Read Also:
- What is the Company? Meaning, Features and More.
- One Person Company: Meaning, Features, and More.
- Private Limited Company: Meaning, Features, and More.
- Public Limited Company: Meaning, Features and More.
- Types of Companies under the Companies Act, 2013
- Corporate Veil Theory
- Incorporation of a Company: Meaning, Procedure, Advantages and Disadvantages, etc.
QNA/FAQ
Q1. Does registering a business as a company give the business a separate legal identity?
Ans: Yes, registering a business as a company gives the business a separate legal identity.
Q2. Is it expensive to run a company?
Ans: Yes, running a company is expensive.
Q3. What is the advantage of limited liability in a company?
Ans: Under limited liability, the members are responsible only for their share or guarantee.
Q4. Write the advantages of the company.
Ans: The following are the advantages of the company:
1. The business gets a separate legal identity.
2. The business continues until it is closed down.
3. The members get the benefit of limited liability.
4. The members can transfer their shares.
5. The business gets capital easily.
6. The business can sue in its own name.
7. The business can purchase anything in its own name.
Q5. Write the disadvantages of registering a company.
Ans: Following are the disadvantages of registering a company:
1. It is difficult to register, operate, and close a company.
2. The business needs to maintain transparency in everything.
3. The company has to fulfill many responsibilities.
4. It is expensive to register, operate, and close a company.
5. Members lose their control over managerial functions.
6. There is more administrative work in a company.
