Meaning ,Characteristics and Types of Company

Meaning and Definition of Company

A company form of organisation is the third stage in the evolution of forms of
organisation. Its capital is contributed by a large number of persons called
shareholders who are the real owners of the company. But neither it is possible for
all of them to participate in the management of the company nor considered
desirable. Therefore, they elect a Board of Directors as their representative to
manage the affairs of the company. In fact, all the affairs of the company are
governed by the provisions of the Companies Act, 1956/2013.

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.

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 authorized 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 Company 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.

Types 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.

The 2013 Act introduces a change in the definition for a private company,
inter-alia, the new requirement increases the limit of the number of members
from 50 to 200. [section 2(68) of 2013 Act].

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 200 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:
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 person Company: – Section 2 (62) of the Companies Act, 2013 states one
person company is a company which has only one person as a member. Rule 3 of
the Companies (In Corporation) Rules, 2014 provides that (i) only on Indian
citizen resident in India can form one person company (ii) Its paid up capital is not
more than 50 lakhs; (iii) Its Average annual turnover should not exceed Rs. 2
crores; (iv) It cannot carry out Non banking financial Investment activities.

References:
https://www.businessmanagementideas.com/organisation/types/company