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Company form of business and shares

Updated on November 11, 2013

Company form of business

Company form of organization occupies a pivotal place in the present day business world. Common consumer items like soaps matches, biscuits, washing powder, bread etc., and major industrial goods like coal, steel, plastic, computers etc is carried out by mostly company form of business.  You maybe aware of companies like NTPC, ONGC, Hindustan Lever, HMT, BHEL, TISCO.  Let us look at how a company like NHPC is distinct from a small trader in your locality from the view point of organizational set up or legal position.

Origin and Meaning of Company.

The origin of company form of business started with the enactment of Joint Stock Companies Act 1913.  Companies like Reserve Bank of India, State Bank of India are come into existence by a special act of Parliament.  Such companies are not governed by the Companies Act and are called Statutory companies.  Now Companies Act 1956 controls all the activities of the company right from the formation to the winding up.

As per Section 3 (1) (i) of the Companies Act, A company means "A company formed and registered under the act or an existing Company"  An existing company means "A company formed and registered under any of the previous companies law.

Definition of a Company:-
  A company may be viewed as an association of persons who contribute money or money's worth to a common stock and use it for a common purpose.  It is a creation of law.  It is also called an artificial person.  A Company has a capital divisible into transferable shares, having a corporate legal entity and a common seal.  Even though the company is a creation of the members of such companies, it is separate and distinct from its members.

Special features of a Company.

We notice the following special features of Companies in the definition and the statutory provisions under the companies Act.

Voluntary Association: Persons who are forming the company come together voluntarily and form a company for carrying out a business.

Limited Liability:  A company may be limited by guarantee or limited by Shares and this is the main feature of a company.  The liability of a member is limited to the unpaid amount of shares held by him in a company limited by shares.No member is bound to contribute anything more than the nominal value of the shares held by him.  For example, if the face value of a share is Rs. 100 and the share holder paid Rs. 80, the he is liable to pay only Rs. 20.(The difference between the face value and the amount already paid).  His liability is limited to the face value of the share i.e. Rs. 100.  If he holds more than one share his liability is limited to the number of shares held by him.  Suppose a share holder holds 100 nos. of shares a company his liability is limited to Rs.100 x 100 Nos. of shares  = Rs. 10000.

In case of a company limited by guarantee, the liability of the member is limited to the amount guaranteed by him to undertake to contribute to the asset of the company. 

Separate Legal Entity: Separate legal entity means that the company is separate and independent from its members.  Accordingly, a company can purchase, sell and hold properties, it can open enter into a contract with others including its own shareholders, it can open bank account in its own name.  So a company has a separate legal entity.

Perpetual Succession:  A company continues to exist irrespective of changes in membership of the company as it is an artificial person and never dies.  Also it is to be noted that the death or insolvency of an individual member does not affect the continuity of the company.

Transferability of shares:  A member can sell or buy shares of a company from the open market.  It is transferable.  Liquidity for the investment of member of a company is possible by this facility.  A Company cannot stop or prevent the absolute right of the shareholder to transfer the ownership by a provision in the article of the company.  But the manner in which the transfer of shares can be prescribe in the articles of a company. So the shareholder has the absolute right to transfer or hold the share of the company as he desire.

Common Seal: A company cannot sigh as it is an artificial person and this draw back is over come by a company seal.  Whenever there is need of its signature it use the company seal.  A common seal is used as a substitute for its signature.  Any documents without the company seal is not authenticate or binding on the company. By using the common company seal, it sign and enter into a contract.

Capacity to sue and be sued:  A company can sue and be sued in its own name since it enjoys the status of an artificial person.

Separate Property:  A company is a legal person and it is distinct from its members.  Since it is a legal person it is the owner of its assets and bound by its liabilities.  It is capable of owning, disposing and enjoying its property in its own name.  The shareholders are not the joint owners of its assets, even though the capital and the assets of the company are contributed by its shareholders.  So the property owned by the company is not the property of its shareholders. 

Kinds of Companies

Companies can be divided into three categories on the basis of liability.

Companies limited by shares: In such companies, the liability of the shareholder is limited to the unpaid amount of the shares if any. During the existence as well as at the time of winding up, such liability can be enforced. If the shares are fully paid then there is no liability to the holder of the share.

Companies limited by guarantee:
In the case of companies limited by Guarantee, the liability of the member is limited to the amount which he undertake to contribute in the event of winding up of the company. Thus, the liability shall arise only on the event of winding up.

Unlimited Companies: In such companies, liability of the members is not limited at all. They are bound to contribute the necessary amount in order to pay off company's debts and liabilities. Such companies are not found in practice.

A company can be divided in to two categories on the basis of number of members: (i) Private Company (ii) Public Company

1. Private company: As per the Companies Act, a private company is a company which by its articles: (i) restricts the right to transfer its shares, if any; (ii) limits the number of its members to fifty (excluding its employees); and (iii) prohibits any invitation to the public to subscribe for any shares in, or debentures of the company.

2.  Public Company: A public company means a company which is not a private company, that has issued securities through an IPO (Initial Public Offering) and is traded on at least one stock exchange or in the over the counter market. 


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