COMPANY: MEANING, CHARACTERISTICS, AND TYPES

INTRODUCTION:

A Company denotes a group of persons who have volunteered to achieve common targets incorporated themselves into a distinct legal identity. A company is an artificial person incorporated by an association of persons by a process of law to generate profits through their commercial activities and its capital is divided into parts that are called shares. A company on incorporation becomes a body corporate or corporation.

DEFINITION:

Section 2(20) of the Companies Act, 2013, states that a “Company” means a company that is incorporated under this Act or any previous or earlier company law.

A company may be defined as an incorporated association of individuals in the form of an artificial person, having a separate legal entity, perpetual succession, a common seal, limited liability, and common capital consisting of transferable shares.

Lindley defined Company as an association of many individuals contributing money or money’s worth to a common stock employed in some common business and who share the profit or loss arising from it. The common stock so contributed by the association of individuals is the capital of the company. The persons who contribute to this capital are members of the company. Every member is entitled to a proportion of capital that is known as his share. Although the shares of a company are always transferable, the right to transfer them is restricted.

CHARACTERISTICS OF A COMPANY:

  1. Separate legal entity-:

According to law, a Company is an entity separate from its members. It has an independent corporate existence. Any of its members can enter into a contract with it in the same manner as any other individual can and he cannot be held liable for the actions of the company virtually the entire share capital. The Company’s money and property belong to the Company and not to the share-holder who own the Company.

Solomon v/s. Solomon & Co. Ltd. (1897 A.C.22)-

 Solomon & Co. Ltd. was practically owned by Mr. Solomon. In the event of its’ liquidation, the question arose whether Mr. Solomon had a right to a prior claim about the debentures held by him over the unsecured creditor of the company. The unsecured creditors claimed that since Mr. Solomon and the company is the same they should be paid in priority to Mr. Solomon.

The House of Lords held that in the eyes of law when a company is incorporated, it becomes a separate person. Therefore, the company was independent of Mr. Solomon. Although Mr. Solomon was the holder of all the shares of the company, he was also a creditor secured by debentures. So, Mr. Solomon had a right to repayment in priority to an unsecured creditor of the company.

In Re: Kandoli Tea Co. Ltd. (1886)-

A Tea Estate was transferred to a Company by some individuals who become the share-holder of the Company. These individuals claimed exemption from ad valorem duty by saying that the transfer of the tea estate was from them to themselves under another name. However, the Court rejected this contention and observed that as the Company was a separate body from the shareholders the said transfer was as a  transfer of property as if the shareholder had been different persons.

  • Limited Liability-:

A Company may be either a Company that is limited by shares or a company that is limited by guarantee. When a Company is limited by shares, the liability of each member is limited to the unpaid value of the shares held by them. Whereas in companies limited by guarantee, the liability of each member of the Company is limited to the fixed amount given in the Memorandum of Association of the company that the members of the company undertake to pay when the company goes into liquidation.

  • Perpetual Succession:

A Company never dies as it is a juristic person with perpetual succession. Its existence does not depend on the life of its members. Insolvency, mental disorder, or retirement of any of its members does not affect it. As a company is created by a process of law it can be dissolved only by a process of law. Members keep changing but the Company goes on forever until dissolved. A Company’s existence is not affected by the change in the composition of its membership.

  • Common Seal-:

As we have seen earlier that a company is not a human being but an artificial person. Thus, it needs human beings to carry out business. On all the documents of the company, an official signature of the company is affixed by its employees. This official signature is known as the Common Seal of the company.

However, the Companies (Amendment) Act, 2015 has made the provision of a company having it’s Common Seal optional. Section 9 of the Act fails to have the phrase ‘and a common seal’ thus providing an alternative mode of authorization for companies who do not wish to have a common seal.

As per this amendment, if a company fails to have a common seal, then the authorization shall be done by two Directors or one Director of the company and the Company Secretary.

  • Transferability of shares-:

The capital of the Company contributed by its members is divided into parts known as shares. As shares of a member in a company are movable property they are to be transferred in the manner given in the Articles of Association of the Company. The transferability of shares of the company authorizes the members of the company to sell and purchase in the market openly.

  • Separate Property-:

 A company is capable of owning, enjoying, and disposing of property in its name as it is a legal person distinct from its members. As upon Incorporation, a company has an independent corporate existence it can have its asset and liabilities. Although its capital and assets are contributed by a company’s shareholders, they are not regarded as the private or joint owners of its property. The company can have a bank account in his name. As, the company is the owner of its’ capital and assets it can acquire, own, or dispose of the property in its’ name.

In Perumal v. John Devin, the Court held that no person can claim himself to be the owner of the property of the company during its existence or on its winding up.

  • Capacity to sue-:

As a company is not only an artificial legal person but also a body corporate it must have its name. Therefore, a company is entitled to sue or be sued in its corporate name. It may also inflict or suffer wrongs. A company can sue or be sued in many circumstances such as breach of contract entered by it.

  • Artificial legal person-:

Although a Company is an artificial legal person it consists of natural persons who conduct its business. Because of being an artificial person a company cannot act independently. Thus it needs natural individuals as it can act only through its agents like Board of Directors, Managing Directors, Manager, Secretary, etc. As a company is created by law and can be dissolved only by law. A company is an artificial legal person because It has no soul, no flesh nobody and is invisible, intangible and it is not in the shape of the human body.

  • Transferability of Shares:

As the shares of a company are transferable one can sell one’s share of ownership rights to an interested person. Share of a public company are freely transferable, some restrictions are imposed by law in the transferability of shares of private companies. The transferability of shares and limited liability are responsible for the tremendous rise of companies all over the world.

KINDS OF COMPANIES:

  • Based on Incorporation: Based on incorporation, companies are classified into –

i) Registered Companies:

The Registered companies materialize upon receiving a Certificate of Incorporation from the Registrar of Companies, thus, registering themselves under the Companies Act, 2013.

ii) Statutory Companies:

Statutory companies are made by any special Act passed by the Parliament or Central/State legislation. Such companies are independent and they deal with any specified area or any commercial activity. For instance, the Reserve Bank of India was made by enacting the Reserve Bank of India Act and the State Bank of India was made by the State Bank of India Act. Therefore, the statutory company is made by enacting legislation, and all the activities of such a company are controlled by the provisions of that Act.

(iii) Chartered Companies:

Chartered companies originate by way of a Charter made by the sovereign authority like Government, King, etc. For example, the East India Company was a chartered company that was granted a charter from the King of the U.K. for carrying out monopoly trading activities with the Far Eastern countries such as India, Burma, etc. All the activities and operations of such companies are managed according to the provisions of the charter made by the sovereign authority which granted permission for the operation of the company.

  • Based on Liability: Companies can also be classified into three categories based on the liability of its members.

i) Companies Limited by Guarantee:

Where a Company is limited by guarantee, the liability of its members is limited to a particular sum of money the members may undertake to contribute towards the assets of the Company in case of winding up of the company.  Thus every member of the company pledges to pay a fixed amount in the event of liquidation of the company or case of its’ winding up. Such a fixed sum of money or amount is called ‘guarantee’.

            ii) Companies Limited by Shares:

In the case of companies limited by shares, the liability of the members of the company is confined to such a sum of share capital that is still not paid by the members. This liability arises either during the lifetime of the company or at the time of winding up. However, if the members hold fully paid-up shares there is no liability. Most of the companies are incorporated as a company limited by shares.

iii) Unlimited Liability Companies:

An unlimited Company is a kind of company in which there is an unlimited liability on its members. The liability of the members of such a company will not end until the final payment is made by them. These kinds of companies may or may not have a share capital of its own.

  • Based on the number of members: Companies can be categorized into three types based on the number of members.

i) Private Companies:

In the case of a private company one, two, or more persons register a company under the Companies Act. A minimum of two shareholders and two directors are required to form a company. A private company through its articles of association,—

(i) limits the right of members of the company to transfer its shares;

(ii) restricts the number of the members of the company to fifty and in deciding this number of fifty, employee-members and ex-employee member are not considered. Only in the case of One Person Company, the number of its members is limited to two hundred:

 (iii) prohibits giving an invitation to the public to subscribe to its shares or the debentures.

ii) Public Companies:

As per the Companies Act, a ‘public company’ means a company that is not a private company and whose minimum paid-up share capital is of five lakh rupees or such higher paid-up capital, as may be stipulated or directed.

However, a company that is a subsidiary of a company, not being a private company is to be considered a public company even when such a subsidiary company remains in its articles a private company.

The minimum number of members a public company must have is seven members but there is no limit to the maximum number of members.

The securities of a Public Company are listed on a recognized stock exchange and the securities of any member in a public company shall be freely transferable without any restriction.

(iii) One Person Companies:

Section 2 (62) of the Companies Act, 2013 states that a company is a one-person company when it has only one person as a member. Such a company has the benefits of a proprietorship and a company. Thus, the owner of the company can run the company solely by realizing all the legal requirements and also limiting the liability. It is one shareholder corporate entity in which legal and financial liability is restricted to the company only. The individual member is to be considered as the first director of the company. For completing all legal formalities, it is considered a private company. Most importantly, the name of the company must have one person company mentioned in brackets.

  • Based on Control: Companies can also be categorized into three types based on control –i)Holding Companies:

As per Section 2 (46) of the Companies Act, 2013, the holding company of one or more other companies means a company of which all the mentioned companies are subsidiary companies. Thus, if a company controls and manages some other company then it is the holding company of that other company.

A company will be a holding company of another in the below-mentioned cases:

  1. Manages and controls the composition of the Board of Directors of the other company.
  2. Administers or controls more than 50% of the total share capital either on its own or together with one or more of its subsidiary companies.

ii) Subsidiary Companies:

Subsidiary companies are either fully or partially owned by another company. They are also known as sister companies.

Section 2 (88) (i) of the Companies Act states that a company in which the holding company regulates the formation of the Board of Directors is called a subsidiary.

iii) Associate Companies:

 Section 2(6) states that an Associate Company concerning another company, means a company in which that other company has a remarkable control, but which is not a subsidiary company of the company having such control and it also includes a joint venture company. Here, an agreement is made whereby the control is of at least twenty percent of the total share capital.

  • Based on Access to Capital-

 Concerning the company’s access to capital, companies may be either listed or unlisted.

(i) Listed companies

In the case of the Listed companies, their securities are listed on stock exchanges. Thus, people can freely buy their securities. Only public companies can be listed, and not private companies as private companies impose restrictions.

(ii) Unlisted Companies

In the case of Unlisted companies, the securities are not listed on stock exchanges. Both, public and private companies, can come under this category.

  • Based on ownership– Companies based on Ownership can be classified into:

i) Government Companies:

A Government company is a type of a company in which not less than 51% of the paid-up share capital is either held by the Central Government or the State Government or partly by the Central Government and State Governments. It also includes any company that is a subsidiary of a Government company.

ii) Non-Government Companies:

In a Non-Government company, the Government does not own a majority stake as such companies are owned and administered by private individuals or private institutions. A company would be regarded as a “Non-Government” company even if the shares are owned by the Government in the company is less than 51%.

  • Based on Nationality- Companies based on Nationality can be classified into:

(i) Indian Companies:

A Company incorporated in India is called as Indian company irrespective of the fact that the operations of the company are being carried on in India or not. Likewise, some of the shareholders of the company may not be Indian citizens but foreigners. In recent times, most large Indian companies have Foreign Institutional Investors (FIIs) as their shareholders.

(ii) Foreign Companies:

Companies that have a place of business in India but are incorporated outside India are called Foreign Companies.

Foreign Companies have to provide some specified documents, like copies of Charter, Statutes, Memorandum, and Articles of the company and details of directors, full address of registered office, and place of business in India within 30 days of establishing a place of business in India to the Registrar of Companies. Foreign companies must also submit to the Registrar of Companies copies of their account statements within the given time.

OTHER TYPES OF COMPANIES:

Small Companies:

Section 2(85) of the Companies Act, 2013 states that a small company is a company which is not a public company and the paid-up share capital of which shall not be more than fifty lakh rupees or a prescribed higher amount which shall not exceed five crore rupees or its turnover shall not be more than two crore rupees or prescribed higher amount not exceeding one hundred crore rupees.

Dormant Companies:

Section 455(1) of the Companies Act, 2013 states that a company formed and registered under this Act for some future project or to hold an asset or intellectual property. A Dormant company has no important accounting transaction. It is an inactive company applying to the Registrar for obtaining the ranking of a dormant company.

Here, when we call a Dormant Company an inactive company it signifies a company not carrying on any business, or has not indulged in any important accounting transaction during the last two financial years, or has no financial statements and annual returns filed by it during the last two financial years.

 Charitable Companies:

These companies are also known as not-for-profit companies as they have charitable objectives or intend to promote commerce, art, science, sports, education, research, etc.

According to Section 8 of the Companies Act, 2013, although such companies are registered as limited companies, they are not allowed to use the word limited or private limited after their company’s name. Their main intention is to use the profits of the company or any other income for the benefits of the common people. The dividend is not paid to any of its members. The Central Government issues license according to the terms prescribed in the Act to subject them to certain restrictions.

Producer Companies:

A producer company is a legally recognized organization of farmers/ agriculturists thereby aiming to improve the standard of their living and ensure a good status of their available support, incomes, and profitability. The Companies Act 1956, provides that a Producer Company can be formed either by 10 individuals or more or 2 institutions or more or by a combination of both meanings 10 individuals and 2 institutions. Their business objective is either procurement production, harvesting, grading, pooling, handling, marketing, selling, or export of the primary production of the Members or import of goods or services for their benefit.

Public Financial Institutions:

Some of the public financial institutions are the Industrial Credit and Investment Corporation of India Limited, the Industrial Finance Corporation of India, the Industrial Development Bank of India, the Life Insurance Corporation of India, the Unit Trust of India, etc.

  The Central Government may specify any other institution as a public financial institution by notification in the Official Gazette.

CONCLUSION:

From the above discussion, we can conclude that the kinds of companies are based on the features, ownership, liability, and the applicable Company Act. The type or categorization of a company depends on many things such as incorporation, control, ownership, the number of members, liability, a Charter from the sovereign authority like Government, King, special act or bill passed by the Parliament or State Legislatures, the purpose of the company, location of the company, etc.

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