Consequence of Incorporation

1. INTRODUCTION
2. OBJECTIVES
3. MAIN CONTENT
4. CONCLUSION
5. SUMMARY
6. TUTOR MARKED ASSIGNMENT
7. REFERENCES/FURTHER READING

INTRODUCTION

As we have seen the House of Lords decision in the case of Salomon v Salomon & Co. Ltd has far reaching effect in company law. The case firmly established the doctrine of corporate personality. The consequence of incorporation therefore is firstly to create another legally recognized entity capable of exercising all the powers of a natural person. In this unit we shall probe further to understand the consequence of incorporation and corporate personality enjoyed by the company.

OBJECTIVES

In this unit the student will be able to understand the consequences of incorporation of companies.

MAIN TEACHING

Upon satisfying the preliminary requirements the registrar is obliged to register the company and issue a certificate evidencing the registration and by virtue of section 37 of the Act, the effect of this is that, “As from the date of incorporation mentioned in the certificate of incorporation, the subscriber of the memorandum together with such other persons as may, from the to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the powers and functions of an incorporated company including the power to hold land, and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned inthe Act. Wewill therefore discuss the consequences of incorporation or the advantages and disadvantages of incorporation hereunder.

Limited Liability

It follows from the fact that a corporation is a corporate person that its members are not as such liable for its debts (Kerr L.J in Raynor (Mincing lane) Ltd v Department ofTrade (1889) Ch. 72 at 176. it follows that the members are completely free from any personal liability. Companies registered under the Company Act may be registered as an unlimited liability company, in which case the members will be personally liable for the debts of the company without any restrictions on the amount involved. The company may be registered as one limited by guarantee, or by shares. Where it is limited by guarantee the member guarantee that he will contribute a specified amount to the assets of the company in the event of its being wound up while he is a member or within one year after he ceases to be a member. While a company that is limited by shares, each member is liable to contribute when called upon to do so tothe full nominal value of the shares held by him in so far as this has  not already been paid by him or prior holder of the shares. The company therefore is responsible for payment or meeting its own obligations and not the individual shareholders. The creditors do not pursue the members, as the liability for the debts and other obligations of the company is strictly that of the company to bear. This has been a great advantage and consequence of incorporation where the company is an unlimited company, the members will be liable personally, and where it is a company limited by guarantee, they contribute only to the extent of their guarantee and this is at winding up. Compared to partnership, the partners are personally liable for the debts and other obligations of the partnership. In order to enjoy limited liability, the Limited Partnership Act 1907 (UK) was enacted for partnership to enjoy limited liability without necessarily registering as a limited liability company. You may see also the Limited Partnership Law of old Western Region now adopted by the states of the old Western Region, for example see the Lagos State, Limited Partnership Law (Laws of Lagos State).

Suing and Being Sued

A very important advantage of an incorporated company is the ability to sue in its own name or being shed. The company being a legal person can take action to enforce its legal rights and can be sued for breach of its legal duties. This continues to be a problem for incorporated companies and other social groups. The problem of suing a large number of persons especially where the membership is not static. This problem has been solved in case of partnerships as they can now sue in the firm’s name, except that the court may order the names of the partners to be disclosed. In case of registered associations the only way out is to sue the trustees, or the trustees may sue on behalf of the association. In case of incorporated societies the only solution is to sue them in a representative capacity, that is, if it is possible to identify their officers or leaders. For instance in case of a family under customary law, the law is that the head of family and other principal members of the family are sued or may sue on behalf of the entire family. This problem however as we have noticed above does not exist in case of incorporated companies.

Property

On incorporation, the property of the company belongs to the company and not the members, as they do not have any proprietary interest or rights but merely in their “shares”.  A change in the membership which normally will cause problems for a partnership will leave the company intact, the membership may change, the shares may be transferred, the property of the company will remain intact. The bankruptcy of the members will not affect the property of the company. While the personal liability of the members to third parties will not also affect the property of the company. The company may lease, mortgage, sell or otherwise dispose its property without affecting the members’ interest in the company. The creditors also look up to the property of the company in case of default.

Perpetual Succession

One of the obvious advantages of an artificial person is that it is not susceptible to “the thousand natural shocks that flesh is heir to”. It cannot become incapacitated by illness, mental or physical, and it has no allotted span of life, in the words of Grear L.J in Stepney Corporation v Osofsky (1937) 3 All E.R. 289 at 291, a corporate body has “no soul to be saved or body to be kicked”. The death of a member leaves the company unharmed.  Members may come and go but the company remains forever. The death of a Managing Director does not mean the death of the company, the company will simply appoint another Managing Director. This is not the case for partnerships, as the death of a member means the end of the partnership. The sickness of a partner may affect the business adversely, in fact there is no other business association that has perpetual succession.

Transferable Shares

Incorporation separates the member’s interests from that of the company. The only identifiable interest of a member in a company is the value and volume of the shares such member holds in the company. These shares are freely transferable without affecting the company’s existence. The company can be incorporated with its liability limited by shares, and these shares, constitutes items of property which are freely transferable in the absence of express provision to the contrary, and in such a way that the transferor drops out. The position of the partner in a partnership is different. The partner may assign his interest in a partnership only with the consent of the other partners, even that the partner continues to be liable for existing liabilities as a partner unless the creditors agree expressly or impliedly to release him. We must realize that a private company even by the definition is a company that restricts transfer of its shares, in spite of this restriction ,the shares may still be transferred subject to the articles of associations, while the public company do not have any restriction whatsoever. Whilst, in a partnership, transfer of interest is not only restricted but where it is allowed, is subject to the consent of the partners, contrary to the position obtainable in incorporated companies.

Borrowing

The ability to raise large amount of money by borrowing money from commercial institutions is a great advantage. One would have expected that the sole trader would find it easier to raise money by borrowing due to its unlimited liability status, but this is not so, the company through the devise of a floating charge may raise money by executing a debenture and charging all its assets, and the charge operates over all the assets of the company. The company is allowed to continue using its assets and the money is not due until the charge crystallize and it becomes fastened to the property of the company. Individuals are not capable of doing this, and may need to convert the business to a limited liability company mainly for the purpose of raising enough capital for the business.

Taxation, Formalities

Incorporation is necessarily attended with formalities, loss of privacy and expense greater than that which would normally apply to a sole trader or partnership. A sole trader is a person  who already exists. A partnership cannot exist without some form of agreement but this can be written, or oral agreement. An unincorporated firm may conduct its affairs without any formality and publicity. An incorporated company however, must involve much expense in terms of complying with the formalities of incorporation, the regulation of the company under the law involves much publicity, and all its officers are open for public scrutiny, anyone dealing with the company is entitled to check its file in the company registry to determine the type and nature of the entity he is dealing with. Where it refuses or neglects to comply with the law it may be sanctioned. The position of the firm or sole trader is not so. It is not required to file any returns; it only needs to comply with the Part B of the Act, for those that need to use a name apart from their real names.

In terms of taxation we need to mention that the company is subject to a different regime of taxation under the Company Income Tax Act Cap LFN 2004, while the sole trader is taxed as such. The company pays its tax as an entity based on its profits and other parameters.

CONCLUSION

The company in deed upon incorporation will enjoy numerous advantages of incorporation, this is so because it is now an entity on its own different and distinct from the members, and is capable of exercising all the powers of a natural person. A next important reality is the separate nature of the company as an entity, though artificial. The company is not subject to any disability unlike a human being, it becomes on adult immediately on registration and is not subject to disabilities as an infant is, the company cannot become insane, or travel or go on holidays, but it nevertheless acts through human agents and officers, but the death of the officers do not affect the life of the company.

SUMMARY

In this unit, we examined the consequences of incorporation. We have seen that the company upon incorporation is given powers of natural person, all the powers and advantages stems from the recognition of the company as a separate legal entity from the members. It has limited liability in the sense that the liability of the members is limited to the shares they own in the company, and if they have paid for the shares, they are not liable for the debts of the company and the company is not liable for the personal debts of the members. It has the power to hold its own property in its own name, it can sue and be sued, and it has the power to borrow much more money from the commercial institutions and the general public. The company shares are freely transferable without affecting the company and the company enjoys perpetual succession, and may only be brought to an end by deliberate act of the members.

TUTOR MARKED ASSIGNMENT

Discuss the advantages and disadvantages of incorporation of company.