This article has been written by Ms. Ankita Bharti, a 2nd year LL.B student from Faculty Of Law, Delhi University.
When a business is formed, one of the essential steps is to register it as a legal entity. The registration process involves creating a legal structure for the business, establishing its ownership and management structure, and complying with various legal requirements. This article will discuss the effect of registration of a company and how it can impact the business.
Legal Recognition
One of the primary effects of registration is recognition of company as a separate entity. After registration of a company, the most important characteristic of a company is that it becomes a legal entity. This means that the company is recognized as a separate legal person from its owners, with its own rights and obligations. As a legal entity, the company can enter into contracts, sue and be sued, own property, and engage in other legal activities.
Limited Liability
Another significant effect of registration of a company is that it provides limited liability protection to its owners. Limited liability means that the owners are only responsible for the company’s debts and obligations to the extent of their investment in the company. In other words, their personal assets are protected from the company’s liabilities. This is a crucial benefit for business owners, as it reduces their personal financial risk.
Taxation
When a company is registered, it becomes subject to certain tax obligations. For example, it may be required to obtain a tax identification number, file tax returns, and pay taxes on its income. The tax implications of registering a company can vary depending on the business structure, location, and other factors. In some cases, registration as a corporation may offer tax advantages, such as lower tax rates or deductions for business expenses.
Access to Funding
Registration of a company can also affect its ability to access funding. Banks and other lenders are more likely to lend to a registered company, as it has a legal structure and is subject to certain regulations. Additionally, registration as a corporation can make it easier to attract investors, as it provides more transparency and accountability. Investors may be more willing to invest in a registered company, as it has limited liability protection and a clear legal structure.
Brand Protection
Registration of a company can also provide brand protection. A registered company can trademark its name, logo, and other intellectual property, preventing others from using them without permission. This can help to establish the company’s brand identity and reputation, as well as prevent others from damaging it.
Compliance Requirements
When a company is registered, it becomes subject to various legal requirements and regulations. These requirements can include maintaining certain records, filing annual reports, and complying with local and federal laws. Failure to comply with these requirements can result in fines, legal action, and other penalties. It is important for business owners to be aware of these compliance requirements and ensure that they are met to avoid legal issues.
Recent Developments:
The Indian government has taken several initiatives to improve the ease of doing business in the country. One of the most significant steps taken in recent years is the introduction of the Companies Act, 2013, which replaced the Companies Act, 1956. The new Act brought several changes, including simplification of the registration process, greater transparency, and stricter penalties for non-compliance.
The government has also introduced several amendments to the Act to ensure that it remains relevant and effective. Some of the key amendments introduced in recent years include:
Companies (Amendment) Act, 2015: The amendment introduced several changes, including the introduction of the concept of one-person company (OPC), simplification of the private placement process, and the removal of the requirement for a minimum paid-up share capital.
Companies (Amendment) Act, 2017: The amendment aimed to make it easier for companies to do business by reducing regulatory compliance and improving corporate governance. It introduced several changes, including the reduction of the maximum number of directors from 20 to 15, the requirement for independent directors to give a declaration of independence, and the introduction of the concept of significant beneficial ownership.
Companies (Amendment) Act, 2020: The amendment introduced several changes, including the decriminalization of certain offenses, the removal of the requirement for a common seal, and the introduction of the concept of a pre-packaged insolvency resolution process.
Effects of Company Registration:
Limited Liability: One of the primary advantages of registering a company is limited liability. In a company, the liability of the shareholders is limited to the amount of their investment in the company. This means that in the event of a loss, the shareholders will not be personally liable beyond their investment.
Separate Legal Entity: A company is a separate legal entity from its owners. This means that the company can own assets, enter into contracts, and sue or be sued in its own name. This provides greater protection to the shareholders and allows for the smooth transfer of ownership.
Access to Funding: A registered company can raise capital by issuing shares to the public or through private placement. This allows the company to access a larger pool of funds than a sole proprietorship or partnership.
Credibility: A registered company has greater credibility than an unregistered entity. It instills confidence in suppliers, customers, and investors and can help the company to establish a strong reputation.
Examples of Company Registration:
Tata Consultancy Services: Tata Consultancy Services (TCS) is a multinational IT services company that was founded in 1968. It is a subsidiary of the Tata Group and is headquartered in Mumbai, India. TCS is registered as a public limited company and is listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Reliance Industries Limited: Reliance Industries Limited (RIL) is a conglomerate that was founded in 1960. It is headquartered in Mumbai, India, and is registered as a public limited company. RIL is listed on the NSE and the BSE and is one of the largest companies in India.
Case Laws
Salomon v Salomon & Co. Ltd: This landmark case is one of the most important cases in company law and established the principle of separate legal entity. In this case, Mr. Salomon was a sole trader who incorporated his business as a limited liability company. The company had seven shareholders, all of whom were members of Mr. Salomon’s family. When the company went bankrupt, the creditors claimed that the company was a sham and that Mr. Salomon should be held personally liable for the debts of the company. However, the House of Lords held that the company was a separate legal entity from Mr. Salomon and that he was not personally liable for the debts of the company. This case established the principle that a company is a separate legal entity and that the shareholders are not liable for the debts of the company beyond their investment.
Lee v Lee’s Air Farming Ltd: In this case, Mr. Lee incorporated his business as a company and became the director and the only employee of the company. While piloting an aircraft owned by the company, Mr. Lee died in an accident. His wife claimed compensation from the company under the Worker’s Compensation Act, but the company argued that Mr. Lee was not an employee of the company as he was also a shareholder and a director. The court held that Mr. Lee was an employee of the company and was entitled to compensation under the Act. This case established the principle that a shareholder can also be an employee of the company and can be entitled to the benefits of employment law.
Macaura v Northern Assurance Co. Ltd: In this case, Mr. Macaura owned a timber estate and transferred the estate to a company he incorporated. He was the majority shareholder and a director of the company. He took out an insurance policy on the timber in his personal capacity, but the policy was in the name of the company. When the timber was destroyed in a fire, the insurance company refused to pay out on the policy as Mr. Macaura did not have an insurable interest in the timber. The court held that Mr. Macaura did not have an insurable interest in the timber as it belonged to the company and not to him personally. This case established the principle that a shareholder does not have an insurable interest in the assets of the company.
Foss v Harbottle: In this case, the plaintiffs, who were minority shareholders in a company, brought an action against the directors alleging mismanagement and fraud. The court held that the plaintiffs did not have standing to bring the action as the company was the proper plaintiff and the majority shareholders had the power to ratify the actions of the directors. This case established the principle of majority rule in a company and that the shareholders have the power to control the affairs of the company.
Dharmendra Textile Processors v Commissioner of Income Tax: In this case, the Supreme Court held that a company is a separate legal entity and that the shareholders cannot be taxed on the profits of the company unless they receive a dividend. This case established the principle that a company and its shareholders are separate entities for tax purposes and that the shareholders are only taxed on the income they receive as dividends.
Conclusion
In conclusion, registering a company has several advantages, including limited liability, access to funding, and credibility. The principles established in case laws like Salomon v Salomon & Co. Ltd and Lee v Lee’s Air Farming Ltd have clarified the legal position of a company and its shareholders, and have contributed to the development of company law. The recent developments and amendments to the Companies Act, 2013 have made the registration process simpler and more transparent, and have made it easier for companies to do business in India.The registration of a company has several significant effects on the business. It provides legal recognition, limited liability protection, and tax obligations, among other benefits. Additionally, registration can impact the company’s ability to access funding, protect its brand, and comply with legal requirements. It is important for business owners to understand these effects and ensure that their business is registered and compliant with all applicable laws and regulation.
References-
- www.toppr.com
- https://en.adgm.thomsonreuters.com
- https://library.croneri.co.uk
- Salomon v Salomon & Co. Ltd case
- Lee v Lee’s Air Farming Ltd case
- Foss v Harbottle
- Dharmendra Textile Processors v Commissioner of Income Tax