Question

Which of the following is/are a/the disadvantage/s of incorporation of a company?

• A. Detailed winding-up procedure
• B. Greater tax burden
• C. Greater social responsibility
• D. All of the above

Answer 1

The correct option is D All of the above

Following are the disadvantages of incorporation of the company:

1. Lifting of corporate veil- though for all purposes of law a company is regarded as a separate entity it is sometimes necessary to look at the persons behind the corporate veil.
   
2. Formality and expense- Incorporation is a very expensive affair. It requires a number of formalities to be complied with both as to the formation and administration of affairs.
3. Company not a citizen- a company though a legal person is not a citizen neither under the provisions of the Constitution nor under the Citizenship Act.
   
4. Tax burden- incorporating a company brings with greater tax burden. Some types of corporations have the potential to result in “double taxation.” Double taxation occurs when a company is taxed once on profits, and again on the dividends paid to shareholders.
5. Social Responsibility- As companies act requires from the companies registered for a corporate social responsibility, for smaller companies it becomes difficult to cope up with greater social responsibilities.