A case for Incorporation

We say a company fully becomes recognised as such after it has been incorporated. A company is incorporated when it has been issued with a certificate of incorporation. The certificate of incorporation is issued after all necessary documents have been submitted at the Registrar General’s Department and registration is completed. The certificate of incorporation is published in the Gazette and is proof of the incorporation of the company. It may however be asked what really the essence of incorporation is. This is discussed below;

Essence of Incorporation

Separate Legal Personality

After incorporation, a company becomes separate and distinct from its members, directors and officers. It becomes a corporate being which has its own existence. Due to this, it is liable for its own debts and losses. The shareholders or directors cannot be sued or incur responsibility for the debts and losses of the company

Ownership of Property

The shareholders or directors have no hold over the property of the company. The company can own property in its own name. A shareholder, regardless of the magnitude of shares owned has no legal interest in the company’s property. The shareholder cannot transact with the company property in anyway whatsoever, for instance taking a loan. An exception however is where a person is a debenture holder.

The firm’s property can be clearly distinguished from that of the members (a particularly key point in a country with a system of family ownership) and difficulties regarding rights and obligations on change of membership of the firm are avoided

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Limited Liability

The character of the company which makes it a separate and distinct personality from its shareholders limits its liability in respect of the shareholders. The company itself is responsible for losses and debts incurred so it has unlimited liability however the shareholders themselves have limited liability.

Capacity to Contract

An incorporated company can fully contract with another company, organisation or an individual. When this occurs only the company can enforce the contract. The company is required to perform its obligations under the contract and can expect the other party to also perform its obligations to it.

Borrowing

An incorporated company can borrow money for its operations and grant a security for a debt. A company can also create a floating charge.

Unlimited Existence

Once the company is incorporated it may exist for as long as it is properly managed and it is in full compliance with regulations. There is no limitation on its period of existence. This accounts for why there are international companies that have been in existence since the 1700s and 1800s. However, there may be certain industries where a company may choose to be in existence for a specific period. The Companies Act requires that companies have at least two directors so that when one director is absent the other will handle the affairs of the company. Also, in situations where one director dies the existing director can hand down information on the management of the company and its operations to the successor of the deceased director. This enables continuity when such a situation occurs.

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Enforcement of Rights

As already stated the company is a separate legal person and so it may sue and be sued in its corporate name. A company has the right to enforce its rights in court and likewise it may be the object of another organisation or individual’s enforcement of rights.

Transferability of Interest

Incorporation confers power on shareholders to transfer their interest in shares. There are however rules applicable to this.

In summary, incorporation though an involving process has many benefits for the members of a company and for the society. The company’s property can be clearly distinguished from that of the members.

The Companies Act was enacted at a time when family inheritance of property was prevalent and so the process of incorporation was very necessary to shield the company from families destroying the business when the founder died.

With incorporation, the business has a better chance of survival and can survive through years and even generations even after the death of the founder. Perpetual succession is one of the greatest advantages of incorporation. Finally, incorporation creates a safe environment for investment. Its limited liability feature protects the personal assets of shareholders.

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