Meaning and Nature of Company

According to the Companies Act, 1956, “A company is a person, artificial, invisible, intangible, and existing only in the contemplation of the law. Being a mere creature of the law, it possesses only those properties which the character of its creation confers upon it either expressly or as incidental to its very existence.”

It can clearly be defined that −               

● A company is defined as a group of people that contributes money or the worth of money to a common stock to employ it in some trade or business. The people in this group share the profit or loss (as the case may be) arising as a result.

● The common stock is usually denoted in terms of money and is the capital of the company.

● The persons who contribute to the common stock are the members.

● The proportion of the capital entitled to each member is called the member’s share.

● Shares are always transferrable subject to the restrictions and liabilities offered by the rights to transfer shares.

The main characteristics of a company are discussed below.

Incorporated Association

● A company can be created only under the registration of the Company Act.

● It comes into existence from the date when the certificate of incorporation is issued.

● At least seven persons are required to form a public company.

● At least two persons are required to form a private company.

● These persons will subscribe to the memorandum of associations and also comply with the other legal requirements of the Company Act in respect of registration to form and incorporate the company, with or without liability.

Artificial Legal Person

A company can be considered as an artificial person (a person who cannot act on his own will). It has to act through a board of shareholders elected or selected by the members of the company.

● The board of directors works as the only brain of the company.

● It has the rights to acquire and dispose the properties, to enter into contract with third parties in its own name, and can sue and can be sued in its own name.

● However, it cannot be considered as a citizen as it cannot enjoy the rights of a citizen.

Separate Legal Entity

A company is perceived to be a distinct legal entity and one that does not depend on its members. The money credited by the creditors of the company can be recovered only from the company and the properties owned by the company.

● Individual members cannot be sued.

● Similarly, the company in any way is not liable for the individual debts of the members.

● The properties of the company can only be used for the development, betterment, maintenance, and welfare of the company and cannot be used for personal benefits of the shareholders.

● A member cannot claim any ownership rights over the company either single-handedly or jointly.

● The members of the company can enter into contracts with the company in the same manner as any other individual can.

● The Income Tax Act also recognizes company as a separate legal entity.

● The company has to pay income tax as it earns profits and when dividends are paid to the shareholders, the shareholders also have to pay income tax based on the dividends earned. This highlights the fact that the shareholders and the company are two separate individual entities.

Perpetual Existence

● A company is said to be a stable form of business organization.

● A company’s life does not depend upon the death, insolvency or retirement of any or all of its shareholders or directors.

● It is created by law and can only be dissolved by law.

● Members can join or leave the company but the company can continue forever.

Common Seal

● A company cannot sign documents by itself.

● It acts through natural persons who are called its directors.

● A common seal is used with the name of the company engraved on it as a substitute of its signature.

● To be legally binding on the company, a document has to carry the company seal on it.

Limited Liability

● A company may be limited by shares or by guarantee.

● In a company limited by shares, the liability of members is limited to the unpaid value of the shares.

● In a company limited by guarantee, the liability of members is limited to such an amount as the members may undertake to contribute to the asset of the company in the events of it being wound up.

Transferrable Shares

● The shares can be freely transferred in case of a public company.

● The right to transfer shares is a statutory right and it cannot be taken away by any provision.

● However, the manner in which such transfer of shares is to be made should be provided and it may also contain bona fide and reasonable restrictions on the rights of members for transfer of their shares.

● However, in case of private companies, the article shall restrict the rights of the members to transfer their shares in companies with its statutory description.

● If a company refuses to register the transfer of shares, a shareholder may apply to the Central Government in order to make the right to transfer shares legal.

Delegated Management

● Any company can be considered as an autonomous, self-governing and self-controlling organization.

● Due to the presence of a large number of members, all members cannot take part in the management of different affairs of the company.

● Control and management is therefore delegated to the elected representatives called directors, who are elected by the shareholders.

● The directors supervise the day-to-day work and progress of the company.