English Company Law - The benefits and drawbacks of incorporation

​English Company Law - The benefits and drawbacks of incorporation
 It is critical to realize the advantages and disadvantages that come while conducting business through a company in order to comprehend the genuine significance of the firm.

Advantages
When compared to operating a business through an unincorporated structure, operating a business through a company provides a number of major advantages.

Corporate Personality 
The fundamental benefit is that the company gains corporate (or distinct, or legal) personality, which leads to a slew of other benefits. This means that the company is treated as if it were a person in the eyes of the law. Humans are classified as natural persons, whereas the firm is a legal entity that can perform many of the same functions as humans.

Liability is limited. 
Because the corporation is a separate entity, the members are normally not personally liable for its debts and obligations; instead, the company is liable. This does not, however, imply that the members are not obligated to contribute anything. When a company's obligation is unlimited, so is the liability of its members. However, because the vast majority of businesses are limited, the members' responsibility will be limited as well.
Limited liability, without a doubt, reduces the risk that members bear and stimulates investment in businesses. Limited liability has the drawback of protecting members while potentially weakening the position of the company's creditors. Creditors in a sole proprietorship or ordinary partnership can collect debt repayment from the sole proprietor's or partners' personal assets. In most cases, the corporation's creditors can only look to the company for payment. Limited liability, it has been argued, does not so much reduce the members' risk as it shifts it away from them and onto the company's creditors.

Perpetual Succession.
Companies are not vulnerable to the same physical flaws that individuals are. As a result, companies can endure indefinitely, and there are countless existing companies  that are centuries old. Members and directors may come and go, but the company survives (for a striking example, see Re Noel Tedman Holdings Pty Ltd [1967] in Australia). Compare this to a partnership that can be dissolved if one of the partners dies.

Capacity for contracting
Because the corporation is a legal entity, it can enter into contracts with both internal and external parties.

[1961] Lee v Lee's Air Farming Ltd 12  AC (PC) Facts: Lee worked as a pilot for a corporation in which he owned 2,999 shares (out of a total of 3,000) and was the sole director. His jet crashed while he was on company business, killing him. His widow claimed compensation from the company for his death, which was only available to the widows of deceased employees under the relevant statute. The insurers for the company contended that Lee was not an employee since he was synonymous with the company and thus had signed a contract with himself (which was illegal under the law because agreement required two parties). Lee's widow was entitled to compensation, according to the court. Lee had established a contract with the firm, which was a different entity, rather than with himself. The fact that he owned practically all of the company's shares and served as its only director did not change the fact that he worked for it.

Asset ownership is important.
As a legal entity, the company's assets are its property. This creates a clear distinction between the company's property and the members' property, and the members have no proprietary stake in the company's assets.

It's crucial to know which property belongs to the company because any capital borrowed by the company is usually secured against the company's assets, not the assets of the members/directors, and if the company fails to repay the loan, creditors can seek repayment against the company's assets, but not against the members/directors' assets (unless personal guarantees have been entered into).

Northern Assurance Co Ltd v Macaura [1925] AC 619 (HL) Facts: Macaura was the owner of a timber yard. He formed a company and transferred all of the timber to it in exchange for a number of shares in the new company. He then insured the timber against fire damage in his own name. The timber was later destroyed in a fire, but the insurance company refused to compensate the owners. The insurance company was within its rights to withhold payment since, while the timber was insured in Macaura's name, it belonged to the company he founded, not to him. As a result, Macaura had no insurable interest in the timber and was unable to make a claim under the policy.

Creating and Participating in other business structure.
A company , like a person, has the freedom to form alternative business structures. A company  can form a partnership with other people or incorporate another company (CA 2006, s 7(1)) or LLP (LLPA 2000, s 2(1)). A company, on the other hand, cannot be a sole proprietorship. A company can also engage in other ventures. A company can be a member of another company (but a subsidiary normally cannot be a member of its owning company (CA 2006, s 136(1)). A business can operate as a company secretary and, at the time of writing, as a director, although this will change once section 156A of the CA 2006 takes effect . A company can be a partner in a partnership or a member of a limited liability partnership (LLP).

Having the ability to file a lawsuit Determining who can sue in circumstances involving unincorporated businesses (particularly partnerships) has proven to be a challenging problem in the past. In the case of companies, there is no such dilemma because it is obvious that when a company is wronged, the company, as a person, is usually the proper claimant. Members can, however, file a derivative claim for a harm done to the company in specific circumstances.

Shares that can be transferred
The transfer of one partner's interest to another in a partnership can be a very complicated process that can have a negative impact on the partnership's operations. Transferring interests in a firm, on the other hand, is simple due to the transferable nature of the share. If a shareholder decides to transfer his interest in the company, all he has to do is sell his shares, and his interest in the company is terminated.

Floating charges 
A 'floating charge' is a type of security that is available to incorporated entities. Floating costs are now prohibited for solo owners and ordinary partnerships. When compared to sole proprietorships and regular partnerships, which, despite their unlimited liability, sometimes find it difficult to raise considerable sums of loan capital, companies with access to this type of security find it easier to borrow money.

Human rights are important.
Because a corporation is a person, several laws that protect individuals may also apply to corporations. For example, the European Convention on Human Rights not only protects natural individuals, but a number of its clauses also cover legal persons (hence, the use of the term "human" in the title may be misleading). For example, Article 1 of the Convention's First Protocol states that "every natural or legal person has the right to the peaceful enjoyment of his belongings."

Disadvantages
While there are several noteworthy advantages to incorporation, a promoter considering incorporation should be aware of some downsides.

Formality, regulation, and public awareness have all increased.
Unincorporated firms are not subject to the same level of formality and regulation as corporations. Setting up a corporation is more difficult than forming a sole proprietorship or a regular partnership. The increased formality and regulation extends beyond the foundation of the firm, with complex requirements that can apply throughout its lifetime. Directors are bound by a number of legal obligations that sole proprietors and partners are not. Incorporation also means a loss of privacy, as most businesses must make some information (such as financial statements) publicly available for the duration of their existence. Furthermore, the Companies House Service provides free access to all information on Companies House's public register. Only if information on a company's commercial actions is freely available can it be held accountable. As a result, the UK company law system has substantial disclosure responsibilities and promotes corporate openness. Significant volumes of financial information (e.g. yearly accounts) are required to be disclosed by businesses. Every year, corporations must prepare a variety of annual reports, with quoted companies required to publish supplementary reports (such as the directors' remuneration report) and comply with FCA Handbook disclosure rules. Companies are also required to keep some information in a number of statutory registers (for example, the register of members and the register of directors), which are open to the public. The SBEEA 2015, for example, adds a new Pt 21A to the CA 2006, requiring firms to keep a new record, the PSC register, which lists persons with considerable power over the company. The Register of People with Significant Control Regulations 2016 has detailed rules.

Liability, both civil and criminal
As mentioned before, if a firm has been wronged, it can file a lawsuit to correct the situation. Similarly, if a firm commits a civil wrong, it can be sued and have a remedy imposed on it (for example, compensation, or an order to halt or engage in a specific act). A corporation can also be found guilty of a crime. However, it was established in the case of R v ICR Haulage Ltd [1944] that because a corporation cannot be imprisoned, it cannot be found guilty of any offence for which the only punishment is imprisonment (e.g. murder). Because a firm can only function as a result of the conduct of others, imposing civil and criminal culpability on it adds to the complications.