The biggest advantage of doing business through a Company is the Transferable shares of a Company and the ease in which the shares can be transferred by the Company.
When Companies were established, the main objective was to facilitate the ease of transfer of shares / ownership of the Company. Previously, transferring the rights of businesses was not an easy process and required a lot of documentation and paperwork. Furthermore, it was a lot more cumbersome and finding investors for your business was very difficult. Therefore, with the advent of Companies, transferring the ownership of your business has become very easy. It is interesting to note that business being run by a partnership firm and / or a proprietorship concern, all the assets / liabilities would now have to be shifted to a new firm or a new individual which would be a very big disincentive for the people to purchase / take over profit making businesses. Even investing in such a business would require a lot of effort. However, the best advantage of having a Company is that the shares / ownership of the Company can be transferred from one person to another, but the Company is not affected. The main reason for this is that a Company is having an Independent Corporate Existence (click here to read more about Independent Corporate Existence), Perpetual Succession (Click here to read more about Perpetual Succession) and a Separate property (Click here to read more about Separate Property).
The assets that are owned by the Company and the liabilities of the Company are not affected at all with the change in the shareholding structure of the Company. Further, in a Partnership Firm, a Partner cannot even transfer his / her right to another person without the consent of the other Partners. In case the partner transfers his / her right to another person without the consent of the other partners, the transferee has no right in the partnership except for some rights in the dissolution of the Partnership. Therefore, to overcome this drawback of the Partnership firms and the Proprietorship Concerns, it was decided that there would be ease of transfer of shares in a Company. Doing so, the businesses could now be sold easily, taken over easily and getting investments from the public became very easy.
According to Section 44 of the Companies Act, 2013,
“44. Nature of shares or debentures.
The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.”
Therefore, the procedure of transfer of shares of a Company will be as per the Articles of Association of a Company. Running a business through a Company gives flexibility to a businessman as he can sell his business off to another person and easily get out of the business by simply selling the shares of the Company. By doing this, he is in no way affecting the business that the Company is already running.
Let us presume two situations, one in which a Cafe / Restaurant is being run by a partnership firm and the second it is being run by a Company. In both the cases, there are 7 partners / shareholders who are having their stake in the Restaurant / Cafe. The land is also owned by the Partnership Firm / Company. In the First scenario, if the Partners want to sell their business to a third person, they will even have to get the land transferred in the name of the Third person. This would involve payment of various taxes and duties and would be a very long and cumbersome process. However, if we look at the second scenario, if the 7 shareholders of the Company wish to sell their Company to a third person, they can do so by simply selling the shares of the Company that owns the Cafe and its land to the third person and that’s all. There is no requirement whatsoever to transfer the land in the name of the new owner as the owner of the land and the Cafe is the Company and since Companies are having perpetual succession and are having a separate property, the requirement of transferring the land is not required and simply the shares of the Company can be sold without having to pay any taxes and duties for the transfer of land.
It is even beneficial for the general public altogether as they get to be a small owner of a Company (Shareholder of a Company) which may be a very big MNC (For example Tata, Reliance, etc.). They too can take the benefit of investing in a Company by purchasing the shares of the Company in the stock market. Doing so, they can also reap the benefits of a Company and the Company gets investment in return from the General Public.
