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
• 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.
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
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
• Directors acting beyond powers:
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:
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
• Improper use of Name:
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.
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:
is liable to pay any unpaid tax and repayment of loans arising after the
dissolution of the company.
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.
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.