[Commerce Class Notes] on Disadvantages of Incorporation Pdf for Exam

A company refers to a group of individuals who are associated together to attain a common goal. A company incorporated under the Companies Act of 2013 or any other company law is legally defined as a company. There are certain advantages and disadvantages of incorporation. Incorporating a company can create a separate legal entity for itself, have perpetual succession, provide power to own particular property, create the capacity to sue, and have easier access to capital. However, it also has some significant disadvantages. 

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The image shows the paperwork on the incorporation of a company. The disadvantages to incorporation are further explained in the details below.

Introduction to Incorporation 

Incorporation is the legal process of formation of a new corporation of any kind such as a business, sports club, cafe, nonprofit organization, etc. Incorporation becomes an independent legal entity that is recognized by law. These companies can be identified on their behalf by terms such as “Inc” and “Limited”. It will be a  legal entity completely separated from the owner.

Steps in Incorporation of a Company 

1. Determining the availability of names 

2. Drafting Articles of Incorporation and Articles of Incorporation 

3. Prints, signatures, stamps, memorandums and article reviews

4. Power of Attorney

5. Documents to be Filed with the Registrar of Companies

6. Statutory Declaration in e-Form

7. Payment of Registration Fees

8. Certificate of Incorporation

 

Disadvantages of Incorporation 

1. Formalities and Expenses 

Starting a business is a very complex and long legal process that requires a great deal of time and money. These sophisticated procedures discourage people who are seriously and passionately uninterested in doing business. Even after the establishment of the company, it must be very tightly controlled and must follow the statutory provisions of the Companies Act. Certain special events or activities such as accounting, company audits, meetings, borrowing, lending, investment, and capital issuance, dividends, etc. must be carried out and performed strictly in accordance with the Companies Act. 

Other companies do not have to follow as many rules and regulations as they do.

2. Corporate Disclosures 

Despite the large legal framework designed to ensure maximum transparency and disclosure of company information, not all the information is available to the company employees and others in the management. Everyone has limited access to the company’s information. 

3. Separation of Control from ownership 

Shareholders of a company who are in minority do not really have control of the functions and decisions of the company. 

This is because the number of employees in a company is so large that even individuals or  a small number of people cannot make a significant impact on the work of the organization. 

Therefore, the position labeled “ownership” is just a term that has no real meaning. You have no active or complete control over the activities of the company. 

4. Payment of Heavier Taxes in Some Cases 

Compared to other forms of companies, incorporations have to pay higher taxes as they do not receive discounts or minimum tax limits. 

They are also required to pay income tax at a fixed rate on all income, while other legal entities are taxed in stages or at a fixed rate. 

Therefore, many companies often start as private or partnership companies. And as the scale grows, it becomes an incorporated company.

5. Social Responsibility 

Many companies have billions of dollars in assets and employ hundreds of thousands of people. They have a significant impact on society, and these companies often participate in social activities that are part of their corporate social responsibility (CSR) campaigns. These incorporation companies are so influential that they must adhere to certain social norms and contribute to the development of society.