Companies Act of any country defines the word ‘company’ as a company formed and registered under the act or an existing company formed and registered under any of the previous company laws.
Former Chief Justice of the United States, Justice John Marshall, said, “A company is an artificial being, invisible intangible and existing only in contemplation of law.”
Definition of the company by Lord Justice Lindley is, “A company is a voluntary organization of many persons who contribute money or money’s worth to common stock and employs it in some trade or business and who share the profit or loss arising, therefore.”
Characteristics of a Company
There are some salient features that distinguished a company from other forms of business enterprises.
Following are those characteristics/features of the company:
- Incorporated Association.
- Artificial Person.
- Separate Legal Entity.
- Limited Liability.
- Separate Property.
- Transferability of Shares.
- Perpetual Existence.
- Common Seal.
- The company may sue and be sued in its name.
A Company must be incorporated or registered under the Companies Act of your country.
The minimum number required for usually starts from 5 or 7, but it varies from country to country.
A company is created with the sanction of law and is not itself a human being; it is, therefore, called artificially; and since it is clothed with certain rights and obligations, it is called a person. A company is, accordingly, an artificial person.
Separate Legal Entity
Unlike a partnership, the company is distinct from the persons who constitute it. Section 34(2) says that on registration, the association of persons becomes a body corporate by the name contained in the memorandum.
The company being a separate person, y its members are not as such liable for its debts.
Hence, in the case of a company limited by shares, the liability of members is limited to the nominal value of shares held by them.
Thus, if the shares are fully paid up, their liability will be nil. However, companies may be formed with unlimited liability of members, or members may guarantee a particular amount.
- In such cases, the liability of the members shall not be limited to the nominal or face value of the shares held by them.
- In the case of unlimited liability companies, members shall continue to be liable until each dollar has been paid off.
- In case of companies limited by guarantee, the liability of each member shall be determined by the guaranteed amount, i.e., he shall be liable to contribute up to the amount guaranteed by him.
Shareholders are not, in the eyes of the law, part owners of the undertaking.
The Supreme Court held that a shareholder is not the part-owner of the company or its property; he is only given certain rights by law, e.g., to vote or attend meetings, to receive dividends.
Transferability of Shares
Since business is separate from y its members in a company form of organization, it facilitates the transfer of members’ interests.
The shares of a company are transferable in the manner provided in the Articles of the company.
However, in a private company, certain restrictions are placed on such transfer of shares, but the right to transfer is not taken away absolutely.
A company being an artificial person cannot be incapacitated by illness, and it does not have an allotted span of life.
The death, insolvency, or retirement of its members leaves the company unaffected. Members may come and go, but the company can go forever.
A company is an artificial person is not bestowed with a body of natural being. Therefore, it has to work through its directors, officers, and other employees.
But, it can be held bound by only those documents which bear its signatures. The common seal is the official signature of a company.
The company may sue and be sued in its name.
Another fall-out of separate legal entity is that the company if aggrieved by some wrong done to it, may sue or be sued in its name.
Advantages of Company Form of Business
This is because there are many advantages which the company form of business organization enjoys over other forms of business organization.
The main advantages of Company business form are:
- Large Financial Resources.
- Professional Management.
- Large-scale Production.
- Contribution to Society.
- Research and Development.
Let us read about those advantages:-
Large Financial Resources
A joint-stock company can collect a large amount of capital through small contributions from a large number of people.
In public limited companies, shares can be offered to the general public to raise capital. They can also accept deposits from the public and issue debentures to raise funds.
In the case of a company, the liability of its members is limited to the extent of the value of shares held by them. The private property of members cannot be attached to the debts of the company.
This advantage attracts many people to invest their savings in the company, and it encourages the owners to take more risks.
Management of a company is vested in the hands of directors, who are elected democratically by the members or shareholders.
These directors, as a group known as Board of Directors (or simply Board), manage the affairs of the company and are accountable to all the members.
So members elect capable persons having to sound financial, legal, and business knowledge to the board so that they can manage the company efficiently.
Due to the availability of large financial resources and technical expertise, companies can have large-scale production. It enables the company to produce more efficiently and at a lower cost.
Contribution to Society
A joint-stock company offers employment to a large number of people. It facilitates the promotion of various ancillary industries, trade, and auxiliaries to trade.
Sometimes it also donates money towards education, health, and community services.
Research and Development
Only in company form of business, it is possible to invest a lot of money on research and development for improved processes of production, new design, better quality products, etc.
It also takes care of the training and development of its employees.
Although a Sole Proprietor enjoys more advantages than any other form of business, entrepreneurs are found eager enough to expand their venture up to Joint-Stock Company motivated by the above advantages.
Disadvantages of Company Form of Business
Despite many advantages of the company form of business organization, it also suffers from some limitations.
Let us note the limitations of Joint Stock Companies.
- Difficult to form.
- Excessive government control.
- Delay in policy decisions.
- The concentration of economic power and wealth in a few hands.
Difficult to form
The formation or registration of a joint-stock company involves a complicated procedure. Several legal documents and formalities have to be completed before a company can start its business.
It requires the services of specialists such as Chartered Accountants, Company Secretaries, etc. Therefore, the cost of formation of a company is very high.
Excessive government control
Joint-stock companies are regulated by the government through the Companies Act and other economic legislations.
Particularly, public limited companies are required to adhere to various legal formalities as provided in the Companies Act and other legislation.
Non-compliance with these invites heavy penalties. This affects the smooth functioning of office companies.
Delay in policy decisions
Generally, policy decisions are taken at the Board meetings of the company. Further, the company has to fulfill certain procedural formalities.
These procedures are time-consuming and, therefore, may delay action on the decisions.
The concentration of economic power and wealth in a few hands
joint-stock companies is a large-scale business organization having huge resources. This gives a lot of economic and other power to the persons who manage the company.
Any misuse of such power creates unhealthy conditions in the society, e.g., having a monopoly over a particular business or industry or product, exploitation of workers, consumers, and investors.
Suitability of Company Form of Business
A joint-stock company form of business organization is found to be suitable where the volume of business is large and huge financial resources are needed.
Since members of a company have limited liability, it is possible to raise capital from the public without much difficulty.
This form of organization is also suitable for businesses that involve heavy risks.
Again, for business activities that require public support and confidence, a joint-stock form is preferred as it has a separate legal status.
Certain types of businesses, like the production of pharmaceuticals, machine manufacturing, information technology, iron and steel, aluminum, fertilizers, cement, etc., are generally organized in the form of a Company.
A company may be an association of persons, associate together to carry on a lawful business with a view of profit.
Companies may be;
- companies limited by shares,
- companies limited by guarantee, and
- unlimited companies.
Read our article on types of companies to understand how companies are classified.
The vast majority of companies are with limited liability by shares. 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 member is entitled is his “share.” Shares in a company are transferable.