Unit 1
COMPANY
A company is a legal entity formed by a group of individuals to engage in and operate a business—commercial or industrial—enterprise. A company may be organized in various ways for tax and financial liability purposes depending on the corporate law of its jurisdiction.
The line of business the company is in will generally determine which business structure it chooses such as a partnership, proprietorship, or corporation. These structures also denote the ownership structure of the company.
They can also be distinguished between private and public companies. Both have different ownership structures, regulations, and financial reporting requirements.
Some of the most important characteristics of a company are as follows:
1. Voluntary Association:
A company is a voluntary association of two or more persons. A single person cannot constitute a company. At least two persons must join hands to form a private company. While a minimum of seven persons are required to form a public company. The maximum membership of a private company is restricted to fifty, whereas, no upper limit has been laid down for public companies.
2. Incorporation:
A company comes into existence the day it is incorporated/registered. In other words, a company cannot come into being unless it is incorporated and recognised by law. This feature distinguishes a company from partnership which is also a voluntary association of persons but in whose case registration is optional.
3. Artificial Person:
In the eyes of law there are two types of persons viz:
(a) Natural persons i.e. human beings and
(b) Artificial persons such as companies, firms, institutions etc.
Legally, a company has got a personality of its own. Like human beings it can buy, own or sell its property. It can sue others for the enforcement of its rights and likewise be sued by others.
4. Separate Entity:
The law recognizes the independent status of the company. A company has got an identity of its own which is quite different from its members. This implies that a company cannot be held liable for the actions of its members and vice versa. The distinct entity of a company from its members was upheld in the famous Salomon Vs. Salomon & Co case.
5. Perpetual Existence:
A company enjoys a continuous existence. Retirement, death, insolvency and insanity of its members do not affect the continuity of the company. The shares of the company may change millions of hands, but the life of the company remains unaffected. In an accident all the members of a company died but the company continued its operations.
6. Common Seal:
A company being an artificial person cannot sign for itself. A seal with the name of the company embossed on it acts as a substitute for the company’s signatures. The company gives its assent to any contract or document by the common seal. A document which does not bear the common seal of the company is not binding on it.
7. Transferability of Shares:
The capital of the company is contributed by its members. It is divided into shares of predetermined value. The members of a public company are free to transfer their shares to anyone else without any restriction. The private companies, however, do impose some restrictions on the transfer of shares by their members.
8. Limited Liability:
The liability of the members of a company is invariably limited to the extent of the face value of shares held by them. This means that if the assets of a company fall short of its liabilities, the members cannot be asked to contribute anything more than the unpaid amount on the shares held by them. Unlike the partnership firms, the private property of the members cannot be utilized to satisfy the claims of company’s creditors.
9. Diffused Ownership:
The ownership of a company is scattered over a large number of persons. According to the provisions of the Companies Act, a private company can have a maximum of fifty members. While, no upper limit is put on the maximum number of members in public companies.
10. Separation of Ownership from Management:
Though shareholders of a company are its owners, yet every shareholder, unlike a partner, does not have a right to take an active part in the day to day management of the company. A company is managed by the elected representatives of its members. The elected representatives are individually known as directors and collectively as ‘Board of Directors’.
Key Takeaways:
- A company is a voluntary association of two or more persons.
- Legally, a company has got a personality of its own.
A. Types of Company on the basis of Incorporation
1. Statutory Companies :
These companies are constituted by a special Act of Parliament or State Legislature. These companies are formed mainly with an intention to provide the public services.
Though primarily they are governed under that Special Act, still the CA, 2013 will be applicable to them except where the said provisions are inconsistent with the provisions of the Act creating them (as Special Act prevails over General Act).
Examples of these types of companies are Reserve Bank of India, Life Insurance Corporation of India, etc.
2. Registered Companies:
Companies registered under the CA, 2013 or under any previous Company Law are called registered companies.
Such companies comes into existence when they are registered under the Companies Act and a certificate of incorporation is granted to it by the Registrar.
B. Types of Company on the basis of Liability
1. Companies limited by shares:
A company that has the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them is termed as a company limited by shares.
The liability can be enforced during existence of the company as well as during the winding up. Where the shares are fully paid up, no further liability rests on them.
For example, a shareholder who has paid 75 on a share of face value 100 can be called upon to pay the balance of 25 only. Companies limited by shares are by far the most common and may be either public or private.
2. Companies limited by guarantee:
Company limited by guarantee is a company that has the liability of its members limited to such amount as the members may respectively undertake, by the memorandum, to contribute to the assets of the company in the event of its being wound-up. In case of such companies the liability of its members is limited to the amount of guarantee undertaken by them.
The members of such company are placed in the position of guarantors of the company’s debts up to the agreed amount.
Clubs, trade associations, research associations and societies for promoting various objects are various examples of guarantee companies.
3. Unlimited Liability Companies
A company not having a limit on the liability of its members is termed as unlimited company. Here the members are liable for the company’s debts in proportion to their respective interests in the company and their liability is unlimited.
Such companies may or may not have share capital. They may be either a public company or a private company.
C. Types of Company on the basis of number of members
1. Public Company:
Defined u/s 2(71) of the CA, 2013 – A public company means a company which is not a private company.
Section 3(1) of the CA, 2013– Public company may be formed for any lawful purpose by 7 or more persons.
Section 149(1) of the CA, 2013 – Every public company shall have minimum 3 director in its Board.
Section 4(1)(a) of the CA, 2013 – A public company is required to add the words “Limited” at the end of its name.
It is the essence of a public company that its shares and debentures can be transferable freely to the public unlike private company. Only the shares of a public company are capable of being dealt in on a stock exchange.
A private company that is a subsidiary of a public company, will be considered a public company.
2. Private company:
Defined u/s 2(68) of the CA, 2013 –
A private company means a company which by its articles—
a. Restricts the right to transfer its shares;
b. Limits the number of its members to 200 hundred (except in case of OPC)
Note:
Persons who are in the employment of the company; and persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall be excluded.
Where 2 or more persons hold 1 or more shares in a company jointly they shall be treated as a single member.
Prohibits any invitation to the public to subscribe for any securities of the company;
Section 3(1) of the CA, 2013 – Private Company may be formed for any lawful purpose by 2 or more persons.
Section 149(1) of the CA, 2013 – Every Private company shall have minimum 2 director in its Board.
Section 4(1)(a) of the CA, 2013 – A private company is required to add the words “Private Ltd” at the end of its name.
Special privileges – Private Companies enjoys several privileges and exemptions under the Companies Act.
3. One Person Company (OPC):
With the enactment of the Companies Act, 2013 several new concepts was introduced that was not in existence in Companies Act, 1956 which completely revolutionized corporate laws in India. One of such was the introduction of OPC concept.
This led to the avenue for starting businesses giving flexibility which a company form of entity can offer, while also offering limited liability that sole proprietorship or partnerships does not offers.
Defined u/s 2(62) of the CA, 2013 – One Person Company means a company which has only one person as a member.
Section 3(1) of the CA, 2013 – OPC (as private company) may be formed for any lawful purpose by 1 persons.
Section 149(1) of the CA, 2013 – OPC shall have minimum 1 director in its Board, its sole member can also be director of such OPC.
Some Feature explained
Single-member: OPCs can have only 1 member or shareholder, unlike other private companies.
Nominee: A unique feature of OPCs that separates it from other kinds of companies is that the sole member of the company has to mention a nominee while registering the company. Since there is only one member in an OPC, his death will result in the nominee choosing or rejecting to become its sole member. This does not happen in other companies as they follow the concept of perpetual succession.
Special privileges: OPCs enjoys several privileges and exemptions under the Companies Act.
D. Types of Company on the basis of Domicile
1. Foreign company:
Defined u/s 2(42) of the CA, 2013 – “foreign company” means any company or body corporate incorporated outside India which,—
- has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
- conducts any business activity in India in any other manner.
Section 379 to Section 393 of the CA, 2013 prescribes the provisions which are applicable on such companies.
2. Indian Company:
A company formed and registered in India is known as an Indian Company.
E. Other Types of Company:
1. Government Company:
Defined u/s 2(45) of the CA, 2013 – “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 or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company. Explanation – “paid-up share capital” shall be construed as “total voting power”, where shares with differential voting rights have been issued.
Special privileges: Government Company enjoys several privileges and exemptions under the Companies Act.
2. Subsidiary Company:
Defined u/s 2(87) of the CA, 2013 – “subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company—
- controls the composition of the Board of Directors; or
- exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.
Explanation: For the purposes of this clause-
- a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;
- the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
- the expression “company” includes any body corporate;
- “layer” in relation to a holding company means its subsidiary or subsidiaries.
3. Holding Company:
Defined u/s 2(46) of the CA, 2013 –“holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies;
Explanation: For the purposes of this clause, the expression “company” includes any body corporate.
Key Takeaways:
- Companies registered under the CA, 2013 or under any previous Company Law are called registered companies.
- Where 2 or more persons hold 1 or more shares in a company jointly they shall be treated as a single member.
The procedure or formation of a company may be divided into four stages:
1. Promotion
2. Incorporation
3. Raising of capital
4. Commencement of business
1. Promotion:
It is the first stage in the formation of a company.
In this stage the idea of carrying on a business is conceived by a person or a group of persons called promoters. They make detailed investigation about the workability of the idea, amt of capital required, operating expense etc etc..
Before a company an be formed, there must be some persons who have an intention to form a company and who take the necessary steps to carry that intention into operation. Such persons are called promoters.
The promoter is the person who brings a company into existence.
2. Incorporation:
A company is said to be incorporated when it is registered with the registrar under the companies act. The certificate of incorporation is the birth certificate of the company. A company comes into existence from the date mentioned in the certificate.
Procedure for Registration
- The promoter has to first decide the proposed form of company as whether it is to be a public company or a private company.
- They may form the company with limited liability , unlimited liability or limited by guarantee.
- They have to decide the name of the company agreeable and desirable to all. For eg if the name proposed is identical with or closely resembles the name of an existing company , it is undesirable.
- For getting registration an application has to be made to the registrar.
The application shall be accompanied by the following documents:
1. Memorandum of association
2. Articles of association
3. A statement of nominal capital
4. A notice of address of the registered office of the company.
5. A list of directors and their consent to a act signed by them
6. A declaration that all the requirements of the act have been complied with. Such declaration shall be signed by an advocate of high court or supreme court or a chartered accountant who is engaged in the formation of company
Certificate of Incorporation:
If the registrar is satisfied that all the requirements of the act have been complied with he shall register the company and issue a certificate of incorporation.
Conclusive Proof
Once a company is registered incorporation cannot be challenged subsequently. The certificate of incorporation is a conclusive evidence of the fact that:
- all the requirements of the act have been complied with.
- company is duly registered.
- company came into existence on the date of certificate.
- Advantages of Incorporation:
- Transferability of shares
- Separate legal entity
- Perpetual succession
- Common seal
- Separate property
- Capacity to sue
3. Raising of Capital:
After incorporation a company can raise capital by issuing shares. A private company cannot issue shares to public.
In case of public company a copy of prospectus is filed with the registrar and it will be issued to the public. Those who are intended in purchasing share are required to send their application money to company's banker.
On the last date fixed for the receipt of application if the company has received application equal to minimum subscription the directors will start with allotment of shares.
4. Commencement of Business:
A private company may commence its business immediately after incorporation.
But a public company cannot commence business immediately after incorporation but it has to obtain a certificate of commencement from the registrar.
Key Takeaways:
- The promoter is the person who brings a company into existence.
- A private company may commence its business immediately after incorporation.
- A public company cannot commence business immediately after incorporation but it has to obtain a certificate of commencement from the registrar.
References:
- ‘Company Law’ by Brenda Hannigan
- ‘Elements of Company’ Law by N. D. Kapoor
