Incorporation Of Public Limited Company: Advantages And Disadvantages

Coverage of this Article

Key takeaways

-According to the 2013 Companies Act, there is a specific process for incorporating a company. Before starting the company, a certificate of commencement of business is necessary.

Advantages of Incorporation of Company

-Creates a Separate Legal Entity: It indicates a company is independent and distinct from its members, and the members are not responsible for the company's actions, even if they hold the majority of the firm's shares.

Case Law: Salomon vs. Salomon & Co. Ltd.

-Salomon moved his business of boot making, at first run as a sole proprietorship, to a company (Salomon Ltd.), fused with members including himself and his family. -

Case Law: Re: Noel Tedman Holdings Pvt. Ltd.

-Can Own Separate Property: A company can possess property in its own name and its members cannot claim ownership of the company's property since it is regarded by the law as a separate legal entity.

Case Law: Bacha F. Guzdar vs. CIT Bombay

-A shareholder of a timber company, held all shares of the company however one. He likewise insured the timber (asset of the company) on his own name, which was pulverized in fire. At the point when he looked for compensation, it was held that they were not subject 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 possessed was not insured.

Disadvantages of Incorporation of Company

-Cost: The first cost of incorporation includes the amount required to file the articles of incorporation, any potential legal or accounting expenses, as well as the cost of hiring an incorporation administrator to assist with the completion and recording of the papers. For maintaining a company, extra continuing costs apply.

Conclusion

-To sum it up, each component has advantages and disadvantages. Everyone recognizes the advantages of the PLC (Public Limited Company), but there are also certain disadvantages that should not be disregarded.

Key takeaways

• According to the 2013 Companies Act, there is a specific process for incorporating a company. Before starting the company, a certificate of commencement of business is necessary.
• The incorporation of a public company offers additional revenue possibilities through the public offering of new shares.

There is no maximum number of members/shareholders that can form a Public Limited Company in India; however, there is a minimum need of seven members. Anyone may purchase the shares through initial public offerings or through trading on the stock market. Offerings like this help the company raise capital. In comparison to a private limited business, the laws and regulations are the strictest. This is so because the public also owns the money used to invest in the company.

Meaning of Public Company As per Section 2(71) of the Companies Act, 2013- “Public company” means a company which

(a) is not a private company and;

(b) has a minimum paid-up share capital as may be prescribed

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be a public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.

The Public Limited Company is the preferred form of the corporation because it has its own legal existence and a wide range of legal rights to hold property and incur obligations under the Companies Act of 2013. A Public Limited Company's shares are freely transferable to anybody; all that is necessary is the submission and signing of a share transfer form. This is because the company's members, both owners and directors, have no obligation to the company's creditors. A company is a type of legal body that is able to buy, possess, use, and transfer property under its own name. This makes sure that the property cannot be claimed by the investors while the company is operating.

Advantages of Incorporation of Company

• Creates a Separate Legal Entity: It indicates a company is independent and distinct from its members, and the members are not responsible for the company's actions, even if they hold the majority of the firm's shares.

Case Law: Salomon vs. Salomon & Co. Ltd.

• Salomon moved his business of boot making, at first run as a sole proprietorship, to a company (Salomon Ltd.), fused with members including himself and his family. The price for such transfer was paid to Salomon by way of shares, and debentures having a gliding charge (security against debt) on the assets of the company. Afterwards, when the company’s business fizzled and it went into liquidation, Salomon’s right of recuperation (secured through floating charge) against the debentures remain before the claims of unsecured creditors, who would, thus, have recovered nothing from the liquidation proceeds.

In the dissolution of Salomon Ltd., where Salomon was the primary shareholder, Salomon would be held personally responsible for the debt of the company. The question that arose next was whether a shareholder or controller might be held personally accountable for a company's debt in addition to the capital contribution, regardless of the company's separate legal identity. The company was properly incorporated, the House of Lords said, making Salomon & Co. Ltd liable rather than Salomon and giving it its own rights and obligations.

• Company has Perpetual Succession: Perpetual succession, or continuous existence, means that a firm never dies, even if its members perish. A company's membership may occasionally change, although this has no bearing on the organization's continued existence. The Companies Act of 2013's rules provides that a company only terminates when it is legally required to do so.

Case Law: Re: Noel Tedman Holdings Pvt. Ltd.

According to the decision, a company's members may join and leave at any time, but this has no bearing on the legal personality of the company.

• Can Own Separate Property: A company can possess property in its own name and its members cannot claim ownership of the company's property since it is regarded by the law as a separate legal entity.

Case Law: Bacha F. Guzdar vs. CIT Bombay

The Supreme Court ruled that despite being a legal entity with all of its property owned by one member who controls, manages, and disposes of it, a company cannot guarantee its assets in its own name.

• A shareholder of a timber company, held all shares of the company however one. He likewise insured the timber (asset of the company) on his own name, which was pulverized in fire. At the point when he looked for compensation, it was held that they were not subject 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 possessed was not insured.
• Capacity to Sue and be sued: In its own name, the company has the legal right to sue someone or be sued by someone else. While a company can be sued or sued in its own name, it must be spoken by a natural person, and any complaint that is not made on behalf of a natural person is subject to dismissal in the same way as an individual complaint is subject to dismissal when the complainant is not present.
• Capacity to raise finance: Since a company may offer shares or debentures to the public, it is in a far better position to raise financial capital than any other type of business structure. The corporation may easily obtain loans from banks and other financial organisations. This provides the company the ability to raise more money. In addition, the company has the option of establishing a floating charge against its assets as collateral for the money it borrows.

Disadvantages of Incorporation of Company

• Cost: The first cost of incorporation includes the amount required to file the articles of incorporation, any potential legal or accounting expenses, as well as the cost of hiring an incorporation administrator to assist with the completion and recording of the papers. For maintaining a company, extra continuing costs apply.
• Double Taxation: Certain corporate entities, such a C Corporation, may result in "double taxation." When a firm is taxed twice—once on earnings and once on dividends given to shareholders—it is said to be subject to double taxation.
• Loss of Personal Ownership: If a company is a stock corporation, one person does not have complete control of the company. A board of directors that is chosen by the shareholders governs the corporation.
• Required Structure: One must abide by all regulations set out by the state where one has filed while structuring a company. This takes into account the company's administration, operational needs, and bookkeeping procedures.
• Ongoing Paperwork: Most companies are required to keep records of their yearly reports on their financial position. Additionally, the continuous administrative work includes tax filings, financial records, meeting minutes, and any permits required for company operations.
• Difficulty Dissolving – While perpetual existence is a benefit of incorporation, it may also be a drawback since it might take a lot of time and money to complete the dissolution requirements.
• Lifting of Corporate Veil: A company is a legal person independent from its members from the perspective of law. The "Veil of incorporation" is a term that may be used to refer to this idea. This idea serves as a broad boundary for how the courts view themselves. This Principle has the effect of creating a psychological barrier between the company and its members. In other words, the company is unique from its members in terms of its corporate identity. To get to the person hiding behind the veil or to reveal the true structure and character of the concerned company, the Court may, in a variety of situations, breach the corporate veil or disregard it. The main justification for this is that the law forbids the company structure from being exploited or utilised illegally. The corporate veil will be torn off when the Court believes that the corporate structure is being abused, revealing the true nature and character of the company.

Conclusion

To sum it up, each component has advantages and disadvantages. Everyone recognizes the advantages of the PLC (Public Limited Company), but there are also certain disadvantages that should not be disregarded. Shares are made publicly available by public company registration, expanding commercial opportunities. The incorporation of a public company offers additional revenue possibilities through the public offering of new shares.

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