Why is Incorporation important?
Incorporating or registering a business gives it an artificial existence in law, limiting the liability of the entrepreneur. He no longer remains liable for all the debts a company may incur. A company and its members or ‘shareholders’ as they are termed are distinct from each other.
If a company bankrupts, neither the shareholders nor the employees can be held liable to pay the dues. The shareholders share in the profits of the organization, but their liability in case of losses is limited only to the extent of their shares. Thus, they bloom in spring but don’t wither away in autumn.
A sole proprietorship or a partnership thus suffers from this handicap of limited liability. The owner is responsible to compensate the debtors wholly until their liability is discharged. For reasons like these, it is important to get the business incorporated by consulting with a good startup attorney in India .
The most common reason to incorporate a business is to limit your own personal liability for business obligations. This is often recommended in the event you have plenty of outside contracts. In addition, as a company’s ownership is comprised of shares that are simple to transfer to another, a corporation is an excellent choice if you’re planning to offer the business or want to attract outside investors. Unlike a general partnership or a sole proprietorship, a company continues to exist beyond the lives of its own founders.
Depending on your own individual situation, company incorporation may save money on taxes, or it induces one to pay more in taxes. An experienced Chartered Accountant in India can guide you on the tax effects of incorporating a business in India.
Basic Rules of Incorporating a Business in India
A business needs to get it Articles of Incorporation drafted by a startup lawyer in India and file them with the state if you’ve considered the pros and cons and decided that you would like to incorporate. Each state has its rules regarding incorporation of a new business, but there are some ground rules that must be followed regardlessly. These rules are:
The Business Name
The business name must differ from the name of any other business entity registered to conduct business in one state. The majority of states have a web-based search tool that allows a business to conduct research about the names of existing business.
A business cannot use particular words in its name, which may be obscene or inconsistent with the kind of activities undertaken. For instance, a business cannot add the words ‘bank’ if it is not a financial institution.
The Business Address
The business must have a substantial place or office to conduct its activities. This address must be valid and registered with the Registrar of Companies.
Names of Directors/ Decision Makers of the Business
There are two kinds of decision makers in any business: the incorporators and directors. The incorporators’ duty is limited to filing the Articles of Incorporation and selecting the Board of Directors. Under some State rules, it is required to record the company’s first Board of Directors.
The responsibilities of this Board include establishing corporate goals and policies, identifying officers who'll conduct the company’s day-to-day business. Generally, in a startup, the Board of Directors comprises of the primary owners and investors of the company. A startup advocate in India , who holds experience in incorporation of businesses, can guide you about these requirements under the State rules which are applicable to your business.
Names of Company Owners
The owners of a company are known as stockholders, as they own shares of stock in the business. A business is required to define the number of stockholders, however, naming each stockholder is not important.
Benefits of Company Incorporation
- The registration of a company builds the morale of all the people associated with the company. The employees, members, debtors, and creditors are assured of the credibility of its existence.
- The company can sue and be sued in its own name. This means that the company can file lawsuits in its name, and challenge them.
- A company never dies as it enjoys perpetual existence. Death or withdrawal of any person would not endanger its existence. Members and employees can effectively carry the business on.
- Easy transferability of shares without seeking any permissions or approvals is another added advantage. An investor can pull out his funds as and when he needs.
Disadvantages of Incorporation
- Certain legalities have to be undertaken in the process of incorporation.
- In case of criminal offences committed under the garb of a company, courts are known to lift the corporate veil and book the directors of the company for such activities.
Incorporation of a business gives it a legal identity. The entire process is comprised of numerous legalities and it is advised to consult the best startup lawyers in India to get your business incorporated. Hire the best Legal and CA experts in India through Legistify - Call us at 011-33138123 or send us an email at email@example.com .