Company - Characteristics, Kinds

Define a Company. What are its characteristics? State the different kinds of companies which can be registered under the Companies Act, 1956.

According to Section 3 (1) (i) of the Companies Act, 1956, a company means, “A company formed and registered under this Act or an existing company.” An existing company means a company formed and registered under any of the previous Company laws. This definition does not throw much light on the nature of a company. For the purpose of understanding the features of a company, we have to take the assistance of other definitions. One of such definitions is given by Justice Lindley: According to him, a company is – ‘an association of many persons who contribute money or money’s worth to a common stock and employed for a common purpose. The common stock so contributed is denoted in money and is 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 are always transferable although the right to transfer them is often more or less restricted’.  

Characteristics of a company: 1. Separate legal entity. A company formed and registered under the Companies Act is a distinct legal entity. It is a creation of law and is therefore called an artificial person or a legal person. It has invisible and intangible existence. It therefore follows that since a company is brought into existence by aw, its existence can be terminated only b law. It has no natural death like other natural persons. It is an entity distinct from the members forming it. Hence, it makes no difference between a company having only two shareholders and a company having two hundred shareholders. In either case, the company is a separate legal entity. 2. Perpetual succession. A company registered under the Companies Act never dies. It has perpetual succession. It is not affected by the death or insolvency of the members. The members may join and leave, but the existence of the company goes on for ever. The corporate existence of a company is not affected by the departure of the members for any reason including death of members. 3. Artificial person, but not a citizen. Company is an artificial person, in the sense that it is created by law and has its existence only in the eyes of law. It can perform all the legal acts such entering into contracts, acquiring movable and immovable property etc. in its own name. But since it has no physical existence, it has to function through its board of directors. Similarly, it does not enjoy the rights conferred on the citizens under the Constitution. For example, a company does not have the right to cast vote nor does it have any of the fundamental rights. A company may have a domicile, but does not have the above rights which are enjoyed by a natural person who is a citizen of India. 4. Limited liability. Limited liability of members is another most important characteristic of a company. In other words, the members cannot be required to contribute more than what was agreed by them in the event of liquidation of the company. The liability of members is limited to the value of the shares undertaken by them and hence they are liable to pay only that amount which remains unpaid on the shares. If the shares held by the members are fully paid, no member can be asked to contribute any more in the event of winding up of the company. The personal property of the members is never liable for the payment of debts of the company. 5. Transferable shares. The shares of a company are freely transferable and can be sold and purchased in the share market. Unlike a partnership firm, (where the interest of a partner cannot be transferred to another person without the will and consent of other partners), a member of a company can easily transfer his interest in the company i.e. his shares to another. The shares are treated like movable property and can be sold and purchased in the manner prescribed under the Articles of Association of the company. 6. Common Seal. Since a company is an artificial person, it cannot sign its name on a contract. Common seal is used as a substitute for its signature. The company has a separate legal existence under its own common seal. It can enter into contracts with outsiders, its own directors and members under the common seal. The common seal of a company is identified with its separate existence, distinct from the members.7. Capacity to sue and be sued. Since a company is a legal personality, for the purpose of filing a suit against the company, one does not have to sue through a director or a member. A company can be sued in its own name. Similarly, a company registered under the Act can sue a third party in its own name. 8. Separate property. A company can acquire, hold and dispose of any movable and immovable property in its own name. It does not have to transact through any of its members or directors. All the contractual rights and obligations can be processed by a company owing it its separate existence. It should be, however, noted that a company, being an artificial person, cannot enter into contracts which are personal in nature. For example, a company cannot enter into a contract to marry.

Kinds of companies: 1.Chartered companies. These companies are treated as foreign companies in India. They are incorporated under special Royal Charter issued by the King or Queen. East India Company, Bank of England, Peninsular and Oriental Steam Navigation Company etc. are the examples of chartered companies. The powers and nature of such companies are defined by the Charter which creates them.

2. Statutory companies. A company may be incorporated under a special enactment of the Parliament or any State legislature. Such company is called a statutory company. It is creation of a stature i.e. an Act. Such companies are generally formed to carry out some special public undertaking. Reserve Bank of India, Life Insurance Corporation of India, food Corporation of India etc. are the examples of statutory companies. These companies are mostly for giving service to the society and not for monetary profits. The nature and functions of such statutory companies are regulated by the special Act which creates them.3. Registered companies. Companies registered under the Companies Act, 1956 or other earlier Acts are called registered companies. Such companies come into existence when they are registered under the Act and a certificate of incorporation is granted to them by the Registrar. All companies are now regulated by the Companies Act, 1956. These companies have Memorandum of Association and Articles of Association for their external and internal management. The companies registered under the Companies Act are (a) companies limited by shares, (b) companies limited by guarantee, or (c) unlimited companies.

a) Companies limited by shares. Companies limited by shares are the most common type of companies. These companies have a share capital and the liability of each member is limited by the Memorandum of Association to the extent of face value of shares subscribed by that member. During the existence of the company or in the event of winding up of the company, a member can be asked to pay the amount, if any, unpaid on the shares held by him. If a share fully paid up, there is no further liability on the member.

A company limited by shares may be either a Public Limited company or a Private limited company. There are seven persons required to form a public limited company and there is no maximum limit as to the number of members. The essence of a public company is that its Articles of Association do not restrict the transferability of shares. There is no limit to the maximum number of members and it can invite public to subscribe to its share capital. In case of a private company, there are restrictions as regards the maximum number of members (which is fifty) and transfer of shares is restricted. Further, a private company cannot invite the public at large to contribute to its share capital. b) Companies limited by guarantee. These types of companies may or may not have share capital. Each member promises or guarantees to pay a fixed sum of money in the event of liquidation of the company for payment of debts and liabilities of the company. The amount promised to be paid by a member is called the Guarantee. The liability of each member is restricted to the extent of guarantee given by him. In case the company has a share capital, the liability of the members is twofold; (a) liability to pay the share amount, and (b) liability to pay the amount of guarantee. If it has a share capital, it can be either a private limited company or a public limited company. Such companies are not suitable for ordinary business purposes. They are more suitable for promoting various non-profit objects and therefore the organizations such clubs, trade associations, societies, research associations etc. choose to be incorporated as companies limited by guarantee. c) Unlimited companies. It is a company where the liability of the members is not at all limited. It is unlimited just like a partnership firm. Every member is liable for the whole amount of company’s debts. Of course, every member is entitled to claim contributions from other members.