After reading this article you will learn about:- 1. Meaning and Definition of Company 2. Characteristics of Company 3. Kinds.
Meaning and Definition of Company:
Literary meaning of the word ‘company’ is an association of persons formed for common object. A company is a voluntary association of persons recognised by law, having a distinctive name and common seal, formed to carry on business for profit, with capital divisible into transferable shares, limited liability, a corporate body and perpetual succession.
Definition of Company:
The main definition of a company are given below:
1. According to Justice James, “A company is an association of persons united for a common object.”
2. According to Lord Lindley, “By a ‘company’ is meant an association of many persons who contribute money or money’s worth to a common stock and employ it for some common purpose. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each partner is entitled is his share.”
3. According to Kimball and Kimball, “A corporation is by nature an artificial person created or authorised by the legal stature for some specific purpose.”
4. According to Prof. Haney, “A company is an artificial person created by law having a separate entity with a perpetual succession and a common seal.”
5. According to James Stephenson, “A company is an association of any persons who contribute money or money’s worth to a common stock and employs it in some trade or business, and who share the profit and loss (as the case may be) arising there from.”
6. According to Section 3 (1) (i) of Indian Companies Act, 1956. “Company means a company formed and registered under this act or an existing company. ‘Existing Company’ means a company formed and registered under any of the previous Company Laws.”
Characteristics of Company:
On the basis of definitions studied above, the following are the characteristics of a company:
1. An Artificial Person Created by Law:
A company is a creation of law, and is, sometimes called an artificial person. It does not take birth like natural person but comes into existence through law. But a company enjoys all the rights of a natural person. It has right to enter into contracts and own property. It can sue other and can be sued. But it is an artificial person, so it cannot take oath, cannot be presented in court and it cannot be divorced or married.
2. Separate Legal Entity:
A company is an artificial person and has a legal entity quite distinct from its members. Being separate legal entity, it bears its own name and acts under a corporate name; it has a seal of its own; its assets are separate and distinct from those of its members.
Its members are its owners but they can be its creditors simultaneously as it has separate legal entity. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The shareholders are not agents of the company and so they cannot bind it by their acts.
3. Perpetual Succession:
The life of company is not related with the life of members. Law creates the company and dissolve it. The death, insolvency or transfer of shares of members does not, in any way, affect the existence of a company.
According to Tennyson-
“For men may come, men may go,
But I go on forever.”
In the case of company it may be said that members may come and members may go but the company goes on. It is a legal person having come into being by law and only law can bring its end and none else.
4. Common Seal:
On incorporation a company becomes legal entity with perpetual succession and a common seal. The common seal of the company is of great importance. It acts as the official signature of the company. As the company has no physical form, it cannot sign its name on a contract. The name of the company must be engraved on the common seal. A document not bearing the common seal of the company is not authentic and has no legal importance.
5. Limited Liability:
The limited liability is another important feature of the company. If anything goes wrong with the company his risk is only to the extent of the amount of his shares and nothing more. If some amount is uncalled upon a share, he is liable to pay it and not beyond that.
The creditors of a company cannot get their claims satisfied beyond the assets of the company. The liability of members of a company ‘limited by guarantee’ is limited to the amount of guarantee.
6. Transferability of Shares:
A shareholder can transfer his shares to any person without the consent of other members. Under Articles of Association, a company can put certain restriction on the transfer of shares but it cannot altogether stop it. Private company can put more restrictions on the transferability of shares.
7. Limitation of Work:
The field of work of a company is fixed by its charter. The Memorandum of Association. A company cannot do anything beyond the powers defined in it. Its action is, therefore, limited. In order to do the work beyond the memorandum of association, there is a need for its alteration.
8. Voluntary Association for Profits:
A company is a voluntary association of persons to earn profits. It is formed for the accomplishment of some public good and whatsoever profit is divided among its shareholders. A company cannot be formed to carry on an activity against the public policy and having no profit motive.
9. Representative Management:
The shareholders of company are widely scattered. It is not possible for all the shareholders to take part in the management. They leave their task to the representatives the Board of Directors and the company is managed by Board of Directors.
10. Termination of Existence:
A company is created by law, carries on its affairs according to law and ultimately is affected by law. Generally, the existence of a company is terminated by means of winding up.
Kinds of Companies:
Companies may be classified into various kinds on the following basis:
1. On the basis of incorporation
2. On the basis of liability
3. On the basis of number of members
4. On the basis of control
5. On the basis of ownership.
1. On the Basis of Incorporation:
On the basis of incorporation companies may be classified into the following three categories:
(i) By Royal Charter-Chartered Companies:
A chartered company is created by the charter or special sanction granted by the Head of the State giving certain exclusive privileges, rights and powers to a distinct body of persons for undertaking commercial activities in specified geographical areas. These rights and privileges are to be enjoyed and the powers are to be used within the terms of the charter.
The British East India Company formed in England in 1600 and Dutch East India Company chartered in Holland in 1602 to trade with India and the East and Bank of England (1690) are the examples of such companies. Since the country attained independence these types of companies do not exist in India.
(ii) Statutory Company:
A statutory company is brought into existence under the Act passed by the legislature of the country or state. Powers, responsibilities, liabilities, objects, scope etc. of such a company are clearly defined under the provisions of the Act which brings it into existence.
Usually, such companies are established to run the enterprises of social or national importance. The Reserve Bank of India, the Industrial Finance Corporation of India, the Life Insurance Corporation of India are some of the examples of statutory companies in India.
(iii) Registered Companies:
A registered company is a company which is organised by getting it registered with the Registrar of Companies under the provisions of Companies Act of the country concerned. The formation, working and continuity of such a company are governed by relevant provisions of the Companies Act.
Most of the companies in the field of industry and commerce are registered companies. In India such companies are registered under the Indian Companies Act, 1956.
2. On the Basis of Liability:
On the basis of liability, company may be classified into:
(a) Limited liability companies.
(i) Companies limited by shares
(ii) Companies limited by guarantee
(b) Unlimited liability companies.
(a) Limited Liability Companies:
Where the liability of the members of a company is limited to the extent of the nominal value of shares held by them, such companies are known as Limited liability companies.
(i) Companies Limited by Shares:
Where the liability of the members of a company is limited by the Memorandum of Association to the amount unpaid on the shares, such a company is called company limited by shares. In case of winding up of the company the members cannot be asked to pay more than the amount unpaid on the shares held by them. A company limited by shares may be a public company or a private company.
(ii) Companies Limited by Guarantee:
Where the liability of the members of a company is limited by the Memorandum of Association to such an amount as the members undertake to contribute to the assets of the company in the event of its winding up.
Such type of companies are not formed for the purpose of profit but are formed for the promotion of art, science, sports, commerce and for cultural activities. Such companies may or may not have share capital. If it has a share capital, it may be a public company or a private company.
(b) Unlimited Liability Companies:
Where the liability of members is not limited, such companies are known as unlimited liability companies. Every member of such a company is liable for its debts in proportion to his interest in the company. Such a company can be converted into a limited liability company after passing a special resolution for conversion and applying to the Registrar of Companies for enrolling it as a limited company.
3. On the Basis of Number of Members:
On the basis of number of members, a company may be:
1. Private Company and
2. Public Company.
1. Private Company:
According to Sec. 3(1)(iii) of the Indian Companies Act, 1956, a private company is that company which by its articles of association:
(i) limits the number of its members to fifty, excluding employees who are members or ex-employees who were and continue to be members;
(ii) restricts the right of transfer of shares, if any;
(iii) Prohibits any invitation to the public to subscribe for any shares to debenture of the company.
Where two or more persons hold share jointly, they are treated as a single member.
According to Sec. 12 of the Companies Act, the minimum number of members to form a private company is two. A private company must use the word ‘Pvt’ after its name.
Characteristics or Features of a Private Company:
The main features of a private company are as follows:
(i) A private company restricts the right of transfer of its shares. The shares of a private company are not as freely transferable as those of public companies. The articles generally state that whenever a shareholder of a Private company wants to transfer his shares, he must first offer them to the existing members of the company. The price of the shares is determined by the directors. It is done so as to preserve the family nature of the company’s shareholders.
(ii) It limits the number of its members to fifty excluding members who are employees or ex-employees who were and continue to be the members. Where two or more persons hold shares jointly they are treated as a single member. The minimum number of members to form a private company is two.
(iii) A private company cannot invite the public to subscribe for its shares or debentures. It has to make its own private arrangement to raise its capital or loans.
Advantages of Private Company:
A private company enjoys the following advantages over limited company.
1. A private company is easy to form than a public company. Only two members are sufficient to form a private company.
2. It can start its business immediately after incorporation. Certificate to commence business is not required to be obtained, which is compulsory for a public company.
3. It may pay remuneration to directors and managerial personnel or appoint any one to the office of profits without any restrictions.
4. As no outsiders are its shareholders it is not required to hold a statutory meeting or file a statutory report.
5. It may give loan to directors without obtaining consent or approval of the Central Government.
6. There is a greater flexibility in regard to the management and conduct of the business than in the public company.
7. The control and management is generally in the hands of capital owners, which is not the case with public company.
2. Public Company:
According to Section 3(1)(iv) of Indian Companies Act, 1956 A public company means a company which is not a private company.
If we explain the definition of Indian Companies Act, 1956 in regard to the public company, we note the following:
(i) The articles do not restrict the transfer of shares of the company.
(ii) It imposes no restriction on the maximum number of the members in the company.
(iii) It invites the general public to purchase the shares and debentures of the company.
4. On the Basis of Control:
On the basis of control, companies may be classified into two categories:
1. Holding company [Sec. 4(4)].
2. Subsidiary company [Sec. 4(1)].
1. Holding Company:
According to Section 4(4) of the Companies Act, 1956 “A company shall be deemed to be the holding company of another, if that other is its subsidiary.”
2. Subsidiary Company:
A company is said to be a subsidiary of another if:
(i) The other company controls the composition of its Board of Directors.
(ii) The other company holds more than half in nominal value of its equity share capital.
(iii) It is a subsidiary of such a company which is itself subsidiary of any other company.
For example, if company B is the subsidiary of company A and company C is the subsidiary of company B then company C also becomes the subsidiary of company A. If company D is the subsidiary of company C, it also becomes subsidiary of Company B and A and so on.
5. On the Basis of Ownership:
On the basis of ownership, company may be a:
(i) Government company.
(ii) Non-government company.
1. Government Company:
According to section 617 of the Companies Act. 1956, Government company means, “any company in which not less than 51% of the paid-up share capital is held by the Central Government or by any State Government and includes a company which is a subsidiary of a Government Company.” It may be a public company or a private company.
2. Non-Government Companies:
Non-Government company means a company which is not government company. The majority of companies in India belong to this category.
Foreign company means any company incorporated outside India but has established business in India.
These companies may be of the following two types:
(i) Companies incorporated outside India which established a place of business in India after the commencement of Indian Companies Act, 1956; and
(ii) Companies incorporated outside India which established a place of business in India before the commencement of this Act and continued to have such a place of business in India at the time of commencement of this Act.
After the establishment of business in India the following documents must be filed with the Registrar of Companies within 30 days from the date of establishment.
(i) A certified copy of Memorandum and Articles of the company translated into English.
(ii) The complete address of the Registered Office of the company.
(iii) A list of directors and secretary of the company.
(iv) The complete address of the place at which the company has constituted as its main office in India.
One-man company is that company where one man holds practically the whole of the share capital of the company and in order to meet the statutory requirement of minimum number of members, some dummy names are added. The dummy names which are added are mostly the relatives or friends of principal shareholder.
One-man company is a legal entity distinct from its members. The company in law is equal to a natural person and has a legal entity of its own. The shareholder, even if he holds all the share is not a company. Neither he nor any creditor of the company has any property, legal or equitable in the assets of the company.