Why to incorporate a Company or LLP?

Why to incorporate a Company or LLP?

Business can be carried in 2 ways.

1.      Incorporated business as Company or LLP

2.      Unincorporated Business as Partnership or Proprietorship

Compared to unincorporated business, an incorporated business has the following advantages:

a.      Limited Liability

A Company / LLP has a separate legal entity other than from its promoters (shareholders / partners/ directors / designated partners). Company/LLP and persons who own and manage it are separate. Liability for repayment of debts and liabilities incurred by the Company lies on it and not with the persons who own and manage it unless the liability was occurred due to an intentional action by the promoter. The personal properties of the promoters are not exposed to corporate liabilities. Registering a business as Company or LLP adds up an additional layer of protection to its promoters.

b.      Perpetual Succession

Company / LLP has perpetual succession. Irrespective of the changes in the persons who own and manage the Company/LLP, the Company continues to be the same entity with the same privileges, immunities, estates and possessions. Company / LLP shall continue to exist till its winding up in accordance with the provisions of the relevant law.

c.       Transferability of Ownership / Interest

The shares and interest of any member/shareholder in the Company / LLP is a movable property and is easily transferable in the manner provided by the Articles of Association. In other forms of business, the transfer of interest is not easily possible. Therefore, it is easier to obtain or transfer the membership of a Company.

d.      Separate Property

As a legal entity, Company is capable of owning its funds and other properties. The Company will be the owner of all the property vested with it. The company can control, manage and dispose the same ob its behalf. The property of Company is not the property of its shareholders.

e.      Taxation

As compared to other forms of business organization, company form of organisation is always benefited with lower tax rate, better taxable benefits in terms of tax holidays in specific area of operation, subject to terms and conditions.

f.       Financing the operation

Sole proprietorship or Partnership forms of business, faces the major difficulty in financing its operation. A Company can raise the required funds by issuing its shares to the public or raise funds through accepting deposits.

Being governed by stringent provisions of law, company form of organisation enjoys better creditworthiness with financial institutions. So it is easier to obtain debt financing by the companies from Banks and other financial institutions.

g.      Capacity to sue

Being a legal person, in the eyes of law, a Company can sue in its name and be sued by others. The persons who own / manage the company are not directly liable for the acts and deeds of the company unless there is a violation / misuse of their fiduciary position with the Company.

h.      Governance and disclosure norms

In India, Company form of organisations is governed by the Companies Act, 1956. A Company has to follow various regulatory procedures during the course of its operations ands are subject to comply with stringent disclosure norms. Good governance and transparent disclosure of operations, adds value to the business of the company and thus benefiting the true owners of the company, its Shareholders.