LESSON : 1

MEANING, CHARACTERISTICS AND TYPES OF A COMPANY

STRUCTURE
1.0 Objective

1.1 Introduction

1.2 Meaning of Company

1.3 Characteristics of a Company

1.4 Distinction between Company and Partnership

1.5 Types of Company

1.6 Summary

1.7 Keywords

1.8 Self Assessment Questions

1.9 Suggested Readings

1.0 OBJECTIVE
After reading this lesson, you should be able to:

(a) Define a company and explain its features.

(b) Make a distribution between company and partnership firm.

(c) Explain the various types of companies.

1.1 INTRODUCTION
Industrial has revolution led to the emergence of large scale business
organizations. These organization require big investments and the risk involved
is very high. Limited resources and unlimited liability of partners are two
important limitations of partnerships of partnerships in undertaking big
business. Joint Stock Company form of business organization has become
extremely popular as it provides a solution to overcome the limitations of
partnership business. The Multinational companies like Coca-Cola and, General
Motors have their investors and customers spread throughout the world. The
giant Indian Companies may include the names like Reliance, Talco Bajaj Auto,
Infosys Technologies, Hindustan Lever Ltd., Ranbaxy Laboratories Ltd., and
Larsen and Tubro etc.

1.2 MEANING OF COMPANY

Section 3 (1) (i) of the Companies Act, 1956 defines a company as “a company
formed and registered under this Act or an existing company”. Section 3(1) (ii)
Of the act states that “an existing company means a company formed and
registered under any of the previous companies laws”. This definition does not
reveal the distinctive characteristics of a company . According to Haney, “Joint Stock
Company is a voluntary association of individuals for profit, having a capital divided into
transferable shares. The ownership of which is the condition of membership”.

1.3 CHARACTERISTICS OF A COMPANY

The main characteristics of a company are :
1. Incorporated association : A company is created when it is registered under
the Companies Act. It comes into being from the date mentioned in the certificate of
incorporation. It may be noted in this connection that Section 11 provides that an
association of more than ten persons carrying on business in banking or an association
or more than twenty persons carrying on any other type of business must be
registered under the Companies Act and is deemed to be an illegal association, if it is
not so registered. For forming a public company at least seven persons and for a private
company at least two persons are persons are required. These persons will subscribe
their names to the Memorandum of association and also comply with other legal
requirements of the Act in respect of registration to form and incorporate a company,
with or without limited liability [Sec 12 (1)] .
2. Artificial legal person : A company is an artificial person. Negatively
speaking, it is not a natural person. It exists in the eyes of the law and
cannot act on its own. It has to act through a board of directors elected by
shareholders. It was rightly pointed out in Bates V Standard Land Co. that
: “The board of directors are the brains and the only brains of the
company, which is the body and the company can and does act only
through them”. But for many purposes, a company is a legal person like a
natural person. It has the right to acquire and dispose of the property, to
enter into contract with third parties in its own name, and can sue and be
sued in its own name.
3. Separate Legal Entity : A company has a legal distinct entity and is
independent of its members. The creditors of the company can recover
their money only from the company and the property of the company.
They cannot sue individual members. Similarly, the company is not in any
way liable for the individual debts of its members. The property of the
company is to be used for the benefit of the company and nor for (5) the
personal benefit of the shareholders. On the same grounds, a member
cannot claim any ownership rights in the assets of the company either
individually or jointly during the existence of the company or in its
winding up. At the same time the members of the company can enter into
contracts with the company in the same manner as any other individual
can. Separate legal entity of the company is also recognized by the
Income Tax Act. Where a company is required to pay Income-tax on its
profits and when these profits are distributed to shareholders in the form
of dividend, the shareholders have to pay income-tax on their dividend of
income. This proves that a company that a company and its shareholders
are two separate entities.
4. Perpetual Existence : A company is a stable form of business
organization. Its life does not depend upon the death, insolvency or
retirement of any or all shareholder (s) or director (s). Law creates it and
law alone can dissolve it. Members may come and go but the company
can go on for ever. “During the war all the member of one private
 company , while in general meeting, were killed by a bomb. But the
company survived; not even a hydrogen bomb could have destroyed i”.
The company may be compared with a flowing river where the water
keeps on changing continuously, still the identity of the river remains the
same. Thus, a company has a perpetual existence, irrespective of changes
in its membership.
5. Common Seal : As was pointed out earlier, a company being an
artificial person has no body similar to natural person and as such it
cannot sign documents for itself. It acts through natural person who are
called its directors. But having a legal personality, (8) it can be bound by
only those documents which bear its signature. Therefore, the law has
provided for the use of common seal, with the name of the company
engraved on it, as a substitute for its signature. Any document bearing the
common seal of the company will be legally binding on the company. A
company may have its own regulations in its Articles of Association for
the manner of affixing the common seal to a document. If the Articles are
silent, the provisions of Table-A (the model set of articles appended to the
Companies Act) will apply.
6. Limited Liability : A company may be company limited by shares or a
company limited by guarantee. In company limited by shares, the liability
of members is limited to the unpaid value of the shares. For example, if
the face value of a share in a company is Rs. 10 and a member has already
paid Rs. 7 per share, he can be called upon to pay not more than Rs. 3 per
share during the lifetime of the company. In a company limited by
guarantee the liability of members is limited to such amount as the
member may undertake to contribute to the assets of the company in the
event of its being wound up.
7. Transferable Shares : In a public company, the shares are freely
transferable. The right to transfer shares is a statutory right and it cannot
be taken away by a provision (9) in the articles. However, the articles shall
prescribe the manner in which such transfer of shares will be made and it
may also contain bona fide and reasonable restrictions on the right of
 members to transfer their shares. But absolute restrictions on the rights
of members to transfer their shares shall be ultra vires. However, in the
case of a private company, the articles shall restrict the right of member
to transfer their shares in companies with its statutory definition.
8. Separate Property : As a company is a legal person distinct from its
members, it is capable of owning, enjoying and disposing of property in
its own name. Although its capital and assets are contributed by its
shareholders, they are not the private and joint owners of its property.
The company is the real person in which all its property is vested and by
which it is controlled, managed and disposed of.
9. Delegated Management : A joint stock company is an autonomous,
selfgoverning and self-controlling organization. Since it has a large
number of members, all of them cannot take part in the management of
the affairs of the company. Actual control and management is, therefore,
delegated by the shareholders to their elected representatives, know as
directors. They look after the day-to-day working of the company.
Moreover, since shareholders, by majority of votes, decide the general
policy of the company, the management of the company is carried on
democratic lines.
1.4 DISTINCTION BETWEEN COMPANY AND PARTNERSHIP
The difference between a company and partnership

Company Partnership

1. Mode of creation By Registration by Statute By Agreement

2. Legal Statute Legal entity distinctfrom members, Firm and partnersare not separate;

perpetual succession. no separate entity; uncertainlife

3. Liability Limited liability of members. Unlimited joint and several

liability of partners.

4. Authority Divorce between ownership Right to share mana gement,

 and management Representative common and ownership and

Management. Management.Mutual agency -

Implied authority.

5.