Company with a boon of perpetuity and a separate legal existence
A company is an artificial person and a separate legal entity. Unexpected events like insanity or death or change in directorships of members are quite likely. Such instances will not affect the existence of the company. To grow, a company may need funds from outside. Hence, for an investor, it is easier to trust companies for investing their funds if the said companies have a separate legal existence and perpetuity.
How separate legal existence and perpetuity helps in the growth of the business?
• A long span of life:
The existence of promoters will not affect the company. As a result, the company can continue its business for years beyond the life of its promoters. A Company will have a short life span only in a case where the company is formed for any specific purpose and such purpose is achieved.
• High creditability:
A perpetual existence increases the creditability of the company. The performance of the company does not depend on a single person. Growth is the result of teamwork. The growth reflects the increase in the image of the company.
• Financial assistance:
After incorporation of company investment is required from the market. Investors will invest only in trustworthy companies and in companies with high creditability. Hence, the company gets higher financial assistance from the investors, banks and financial institutions which are more credible. The finance will help to develop the business.
• Limited liability:
The liability of its members is limited only to its unpaid share capital. The members are not personally liable to any creditors. The directors are liable only in case they act beyond their powers.
The members and directors are not liable to pay tax on the earnings of the company. In the case of profits, the company will pay tax to the government. The members are not liable to pay tax on income received as dividends as it is tax-free for members.
Exceptions to the separate legal entity of a company
There are a few cases when the concept of separate legal entity is not applicable to the company. In these cases, the members or directors are personally liable for any act by the company.
• Members reduce below the limit:
In case the members of the company reduce to below the specified limit then the members are personally liable. Minimum 2 members are required for a Private limited company and 7 for a Public limited company. The company has to increase the number of members within 6 months. If this is not complied with, then each member during such period is liable for the debts.
• Investigation of Company:
If a company is under investigation then an inspector has the power to investigate other companies (under the same management) even if the subsidiary is a separate company.
• Directors acting beyond powers:
If the directors enter into a contract on behalf of the company beyond their powers or defraud the creditors then the directors will be held liable for such actions. Here the act is not covered under separate legal entity.
• Non refunded Application Money:
If the application money is not refunded to the applicant who has not allotted the shares within stipulated time then directors are liable to pay interest to them.
• Improper use of Name:
The directors are personally liable for not using the name of the company such as LTD or PVT LTD in a proper way in any contract or bill of payment.
Promoters are personally liable for all contracts made before incorporation of the company if the company does not adopt the said contracts.
• Non-payment of Tax or liability after dissolution:
The director is liable to pay any unpaid tax and repayment of loans arising after the dissolution of the company.
Directors are liable in many other cases such as not maintaining books of accounts or registers, not holding AGM and other compulsory meetings, non-filing of annual returns with MCA, default under any other ACT.
A company with its perpetual existence and a separate legal entity proves advantageous. With such benefit, the promoters and directors must have knowledge about its powers, so that they are not personally held liable for any act. And they must follow all the laws and provisions to avoid penalties to the company as well on themselves.