State the Advantages and Disadvantages of Incorporation.
Advantages and disadvantages of incorporation are as follows:
Advantages of Incorporation:
Independent Legal Entity : A company is an artificial legal person, distinct from members. A partnership firm has no separate legal entity. Partnership firm and partners are treated as one entity. A company is more stable than a partnership firm. The death or insolvency of a member does not affect the company but it affects the partnership firm.
Perpetual Existence : A company enjoys perpetual existence and its life does not depend on the lives of the members whereas a partnership firm automatically gets dissolved by the death, lunacy or retirement unless there is a contract to the contrary
Limited Liability : The liability of the members of a company is limited to the extent of unpaid amount on the shares. In case of companies limited by guarantee, liability is limited to the extent of guarantee given by them. The liability of the partners is unlimited.
Transferability of Shares : In case of public company, shares are freely transferable. But in case of private company, shares can be transferred subject to certain restrictions. In case of partnership firm, a partner cannot transfer his interest without the consent of all other partners.
Large Capital : The number of members is large in case of a company as compared to a partnership firm. In a public company, there is no limit to the maximum number of members. In a private company, maximum number of members is 200 excluding past and present employee members. In a partnership firm, maximum number of members is 50. So, due to large number of members in a company, the capital is much more than in case of partnership.
Separation between Ownership and Management : The company is managed by the directors who are elected by the members. There is separation between ownership and management. Members need not worry about the management of the company. In case of partnership, the firm is managed by the partners who may not always be professionals. In case of company, the directors are professionals and they can manage the company in a better way. Further, in a company, decisions are taken by the majority. This may not always be the case in a partnership firm.
Disadvantages of Incorporation
Too many Formalities and Expenses : Formation of a company involves number of formalities. Incorporation expenses are high and a number of documents have to be filed at the time of incorporation with the Registrar of Companies along with necessary fee for registration. Even after incorporation, company continues to file a number of documents with the Registrar of Companies. The company is required to comply with the provisions of the Companies Act. Even the dissolution of a company is expensive and there is lengthy procedure. On the other hand, partnership can be formed easily. The partners have to enter into an agreement (called Partnership Deed) and expenses on formation are also not very high. Further, a partnership firm can be dissolved easily.
Lack of Secrecy: A public company has to publish its constitution, capital structure, charges on the assets, proceedings of general meetings, final accounts etc and a copy has to be filed with the Registrar of The affairs of the company no longer remain private. On the other hand, in case of partnership firm, number of members is restricted to 50 and therefore, secrets of the firm remain with the partners only.
Wastage and Inefficiency in Management : A company is managed by Directors who are elected by the members. There is divorce between ownership and management. There is lack of personal interest and motivation on the part of Directors. As a result, wastage and inefficiency creep in the management of the company. In case of partnership, partners look after the business of the firm personally and they try to avoid every possible wastage. There is direct link between effort and reward. So, a partnership is managed in a better way than a company and wastage’s are also minimized.