If you have any business idea that can be executed and interested in setting up a new business or interested in changing form of existing business an confused about whether to form a company or not, here is the list of major reasons why you should go for forming a company:
SEPARATE LEGAL ENTITY:
Once a company is formed, it is separate from the owners, who constitute it i.e. shareholders in case of company limited by shares. Working as Separate legal Entity means a business that is defined as detached from another business or individual with respect to accountability (i.e. responsibility).
Corporations are held legally liable for the actions and debts incurred by the business, not the owners.
After incorporation of the Company, it-
- can bring lawsuits,
- can buy and sell property,
- can enter into contract,
- can be taxed,
in its name independently from those who constitutes it.
In Business word, name matters a lot. The name of a company often sounds more prestigious than doing business in individual name. Ram Financial services sounds like a person dealing in financial services. Ram Financial Services Limited Company sounds as if it might be dealt by a large group of people and has large operations, which in turn attract more customers.
Companies can easily raise capital through the sale of securities. Companies can raise its capital by offering shares to the existing shareholders or to the general public or both, depending upon the type of the company. It is usually much easier to attract new investors in the company, as the investors i.e. shareholders have limited liability in case of limited liability company and can easily transfer their shares. Using the structure of the corporation, you can create different types of owners, those who have control, those who are entitled to profit or both.
ESTATE PLANNING/ PLANNING FOR SUCCESSORS:
In company, it is much easier to sell or pass on shares to others, such as to the legal heirs including your children than other business structures. When you, as business owner decide to hand over the business into the hands of your children, you can do so easily by transferring your shares without affecting existence of company and its business, unlike other forms of business. Heirs can be given different percentages and control.
TRANSFERABILITY OF SHARES:
It is important to know, that the ownership interest you have in a business can be readily sold, transferred, or given away to another family member or to public, depending upon your requirement. Shareholders may sell or otherwise dispose of their shares at any time subject to any restriction imposed in the company's Memorandum of Association. The feature of transferability of shares provides easy exit to shareholders, in case they don’t wish to continue as shareholder.
PERSONAL ASSET PROTECTION:
Company can be used as an excellent asset protection vehicle. As after incorporation of company, it enjoys the status of separate legal entity and it can take loan in its name. The company is liable to pay its debts, which is separate liability from its owners, which results in protection of personal assets of the company.
After incorporation of company, company can run for indefinite period. Members may come, members may go, but a company goes on forever. This concept protects the business of the owner forever, until strike off from the register of members by the Registrar of companies.
Legal Existence of the company remains same irrespective of change in members which may occur as follows:
Members may come: By purchasing shares of the company
Members may go: A member may go from company due to any of the following reason, which includes-
- Withdrawal of membership, by selling his/her shares
- Insolvency of the member
- Death of the member
- Member’s incapacity to contract
On the happening of any event specified above, the business exists in same name in the form of company and run by the remaining director and remaining shareholders of the company.
When you incorporate 'limited liability company', the most popular type of company, the shareholders enjoys their limited liability i.e. on the unpaid amount of shares, if any and the company is still liable in full for all obligations that it incurs.
Shareholders of a limited liability company are not liable for the business debts of the company unless:
- They have not fully paid for their shares prior to the company being placed in liquidation. In this case they are liable to the liquidator for any unpaid money owing on their shares.
- They have given personal guarantees to lenders or creditors, such as banks or suppliers, etc.
However, if a corporation does not follow the proper corporate formalities, the concept of separate legal entity may be ignored by a court and the owner may be held personally liable. The formalities include having separate bank accounts, holding meetings, and keeping minutes. When a court ignores a corporate structure and holds the owners liable, it is called piercing the corporate veil.
Credibility means the quality of being trusted and believed in, is greater when you do business in the form of incorporated entity. When any business is incorporated, you gain instant credibility. Higher Credibility results in:
- better and quick availability of loan and
- increase investment and
- Higher reach of customer.
Operating your business as a corporation shows that the business is viable, which is more attractive to creditors and investors.
Disclaimer of Author: The entire contents of this article have been prepared on the basis of relevant provisions and as per the information existing at the time of preparation and are purely based on my understanding. Though utmost care has been taken to provide authentic information, it is suggested that to have better understanding kindly cross-check the relevant sections, rules under companies act, 2013 including its statutory amendment thereon. The information/articles are provided purely for informational and educational purposes only. And do not constitute legal advice or legal opinions. Therefore I cannot take any responsibility for the results or consequences of any attempt to use any information presented on this article.