Company: a Boon of Perpetuity and a Separate Legal Entity

If you want to start a company, then there are various alternatives available to incorporate your business like Sole Proprietorship, Partnership Firm, One Person Company, Limited Liability Partnership, Private Limited Company, and Public Limited Company.

But many people prefer to start a Company because company incorporation is the most popular type of business structure in India and there are various benefits of company incorporation.

The main features of a company are it is an artificial person and it has a separate legal entity from its owners.

How separate legal existence and perpetuity helps in the process of Start a Company?

• A long span of life:

The existence of promoters will not affect the company. As a result, the company can continue its business for years beyond the life of its promoters.

• High creditability:

A perpetual existence increases the creditability of the company.

• Financial assistance:

Investors will invest only in trustworthy companies and in companies with high creditability. Hence, the company gets higher financial assistance from the investors, banks and financial institutions which are more credible.

• Limited liability:

The liability of its members is limited only to its unpaid share capital. The members are not personally liable to any creditors. The directors are liable only in case they act beyond their powers. 

• Taxability:

The members and directors are not liable to pay tax on the earnings of the company. In the case of profits, the company will pay tax to the government.

However, there are certain exceptions to the separate legal entity of a company.

There are a few cases when the concept of separate legal entity is not applicable to the company. In these cases, the members or directors are personally liable for any act by the company.

• Members reduce below the limit:

In case the members of the company reduce to below the specified limit then the members are personally liable.

• Investigation of Company:

If a company is under investigation then an inspector has the power to investigate other companies (under the same management) even if the subsidiary is a separate company.   

• Directors acting beyond powers:

If the directors enter into a contract on behalf of the company beyond their powers or defraud the creditors then the directors will be held liable for such actions. Here the act is not covered under the separate legal entity.  

• Non refunded Application Money:

If the application money is not refunded to the applicant who has not allotted the shares within stipulated time then directors are liable to pay interest to them.

• Improper use of Name:

The directors are personally liable for not using the name of the company such as LTD or PVT LTD in a proper way in any contract or bill of payment.

• Pre-incorporation:

Promoters are personally liable for all contracts made before incorporation of the company if the company does not adopt the said contracts.

• Non-payment of Tax or liability after dissolution:

The director is liable to pay any unpaid tax and repayment of loans arising after the dissolution of the company.

• Others:

Directors are liable in many other cases such as not maintaining books of accounts or registers, not holding AGM and other compulsory meetings, non-filing of annual returns with MCA, default under any other ACT.