Company

The word ‘company’ is derived from the Latin word Com Panis (Com means ‘With or together’ and Panis
means ‘Bread’), and it originally referred to an association of persons who took their meals together. In
the past, merchants took advantage of festive gatherings, to discuss business matters.

n popular parlance, a company denotes an association of like minded persons formed for the purpose of
carrying on some business or undertaking In the legal sense, a company is an association of both natural
and artificial persons and is incorporated under the existing law of a country.

In terms of the Companies Act, 2013 a “company” means a company incorporated under this Act or
under any previous company law [Section 2 (68)]

In common law, a company is a “legal person” or “legal entity” separate from, and capable of surviving
beyond the lives of its members.

NATURE AND CHARACTERISTICS OF COMPANY

1. CORPORATE PERSONALITY: A company incorporated under the Act is vested with a corporate
personality so it bears its own name, acts under name, has a seal of its own and its assets are separate
and distinct from those of its members. It is a different ‘person’ from the members who compose it.
Therefore it is capable of: owning property, incurring debts, borrowing money, having a bank account,
employing people, entering into contracts and suing or being sued in the same manner as an individual.

2. COMPANY AS AN ARTIFICIAL PERSON: A Company is an artificial person created by law. It is not a

3. COMPANY IS NOT A CITIZEN: The company, though a legal person, is not a citizen under the
Citizenship Act, 1955 or the Constitution of India.

4. COMPANY HAS NATIONALITY AND RESIDENCE: Though it is established through judicial decisions that
a company cannot be a citizen, yet it has nationality, domicile and residence.

5. LIMITED LIABILITY:

“The privilege of limited liability for business debts is one of the principal advantages of doing business
under the corporate form of organisation.” The company, being a separate person, is the owner of its
assets and bound by its liabilities. The liability of a member as shareholder, extends to the contribution
to the capital of the company up to the nominal value of the shares held and not paid by him.

6. PERPETUAL SUCCESSION: An incorporated company never dies, except when it is wound up as per
law. A company, being a separate legal person is unaffected by death or departure of any member and
it remains the same entity, despite total change in the membership. Perpetual succession, means that
the membership of a company may keep changing from time to time, but that shall not affect its
continuity.

7. SEPARATE PROPERTY: A company being a legal person and entirely distinct from its members, is
capable of owning, enjoying and disposing of property in its own name. The company is the real person
in which all its property is vested, and by which it is controlled, managed and disposed off.

8. TRANSFERABILITY OF SHARES: The capital of a company is divided into parts, called shares. The shares
are said to be movable property and, subject to certain conditions, freely transferable, so that no
shareholder is permanently or necessarily wedded to a company. Section 44 of the Companies Act,
2013 enunciates the principle by providing that the shares held by the members are movable property
and can be transferred from one person to another in the manner provided by the articles.

9. CAPACITY TO SUE AND BE SUED: A company being a body corporate, can sue and be sued in its own
name.

10. CONTRACTUAL RIGHTS: A company, being a legal entity different from its members, can enter into
contracts for the conduct of the business in its own name.

11. LIMITATION OF ACTION: A company cannot go beyond the power stated in its Memorandum of
Association. The Memorandum of Association of the company regulates the powers and fixes the
objects of the company and provides the edifice upon which the entire structure of the company rests.

12. SEPARATE MANAGEMENT: The members may derive profits without being burdened with the
management of the company. They do not have effective and intimate control over its working and they
elect their representatives as Directors on the Board of Directors of the company to conduct corporate
functions through managerial personnel employed by them. In other words, the company is
administered and managed by its managerial personnel.

13. VOLUNTARY ASSOCIATION FOR PROFIT: A company is a voluntary association for profit. It is formed
for the accomplishment of some stated goals and whatsoever profit is gained is divided among its
shareholders or saved for the future expansion of the company.

14. TERMINATION OF EXISTENCE: A company, being an artificial juridical person, does not die a natural
death. It is created by law, carries on its affairs according to law throughout its life and ultimately is
effaced by law. Generally, the existence of a company is terminated by means of winding up
Companies on the Basis of Liabilities

When we look at the liabilities of members, companies can be limited by shares, limited by guarantee or
simply unlimited.

a) Companies Limited by Shares

Sometimes, shareholders of some companies might not pay the entire value of their shares in one go. In
these companies, the liabilities of members is limited to the extent of the amount not paid by them on
their shares.

This means that in case of winding up, members will be liable only until they pay the remaining amount of
their shares.

b) Companies Limited by Guarantee

In some companies, the memorandum of association mentions amounts of money that some members
guarantee to pay.

In case of winding up, they will be liable only to pay only the amount so guaranteed. The company or its
creditors cannot compel them to pay any more money.

c) Unlimited Companies

Unlimited companies have no limits on their members’ liabilities. Hence, the company can use all personal
assets of shareholders to meet its debts while winding up. Their liabilities will extend to the company’s
entire debt.
Companies on the basis of members
a) One Person Companies (OPC)

These kinds of companies have only one member as their sole shareholder. They are separate from sole
proprietorships because OPCs are legal entities distinct from their sole members. Unlike other companies,
OPCs don’t need to have any minimum share capital.

b) Private Companies

Private companies are those whose articles of association restrict free transferability of shares. In terms of
members, private companies need to have a minimum of 2 and a maximum of 200. These members
include present and former employees who also hold shares.

c) Public Companies

In contrast to private companies, public companies allow their members to freely transfer their shares to
others. Secondly, they need to have a minimum of 7 members, but the maximum number of members
they can have is unlimited.

Companies on the basis of Control or Holding

a) Holding and Subsidiary Companies

In some cases, a company’s shares might be held fully or partly by another company. Here, the company
owning these shares becomes the holding or parent company. Likewise, the company whose shares the
parent company owns becomes its subsidiary company.

Holding companies exercise control over their subsidiaries by dictating the composition of their board
of directors. Furthermore, parent companies also exercise control by owning more than 50% of their
subsidiary companies’ shares.

b) Associate Companies

Associate companies are those in which other companies have significant influence. This “significant
influence” amounts to ownership of at least 20% shares of the associate company.

The other company’s control can exist in terms of the associate company’s business decisions under an
agreement. Associate companies can also exist under joint venture agreements.

Companies in terms of Access to Capital

Listed companies have their securities listed on stock exchanges. This means people can freely buy their
securities. Hence, only public companies can be listed, and not private companies.

Unlisted companies, on the other hand, do not list their securities on stock exchanges. Both, public, as well
as private companies, can come under this category.

Other Types of Companies

Government companies are those in which more than 50% of share capital is held by either the central
government, or by one or more state government, or jointly by the central government and one or more
state government.

b) Foreign Companies

Foreign companies are incorporated outside India. They also conduct business in India using a place of
business either by themselves or with some other company.

c) Charitable Companies (Section 8)

Certain companies have charitable purposes as their objectives. These companies are called Section 8
companies because they are registered under Section 8 of Companies Act, 2013.

Charitable companies have the promotion of arts, science, culture, religion, education, sports, trade,
commerce, etc. as their objectives. Since they do not earn profits, they also do not pay any dividend to
their members.

d) Dormant Companies

These companies are generally formed for future projects. They do not have significant accounting
transactions and do not have to carry out all compliances of regular companies.

e) Nidhi Companies

A Nidhi company functions to promote the habits of thrift and saving amongst its members. It receives
deposits from members and uses them for their own benefits.

f) Public Financial Institutions

Life Insurance Corporation, Unit Trust of India and other such companies are treated as public financial
institutions. They are essentially government companies that conduct functions of public financing.
What are the five forms of business organizations?

The five forms of business organizations include the following:

 Partnership

 Corporation
 Sole proprietorship
 Cooperative
 Limited liability company

Partnership

You can classify a business partnership as either general or limited. General partnerships allow both
partners to invest in a business with 100% responsibility for any business debts. They don't require a
formal agreement. In comparison, limited partnerships require owners to file paperwork with the state
and compose formal agreements that describe all of the important details of the partnership, such as
who is responsible for certain debts.

Some advantages of partnerships include:

Easy to establish: Compared to other business structures, partnerships require minimal paperwork and
legal documents to establish.

Partners can combine expertise: With more than one like-minded individual, there are more
opportunities to increase their collaborative skillset,

Distributed workload: People in partnerships commonly share responsibilities so that one person
doesn't have to do all the work.

Disadvantages to consider:

Possibility for disagreements: By having more than one person involved in business decisions, partners
may disagree on some aspects of the operation.

Difficulty in transferring ownership: Without a formal agreement that explicitly states processes, a
business may come to a halt if partners disagree and choose to end their partnership.

Full liability: In a partnership, all members are personally liable for business-related debts and may be
pursued in a lawsuit.

An example of a partnership is a business set up between two or more family members, friends or
colleagues in an industry that supports their skill sets. The partners of a business typically divide the
profits among themselves.

Corporation
A corporation is a business organization that acts as a unique and separate entity from its shareholders.
A corporation pays its own taxes before distributing profits or dividends to shareholders. There are
three main forms of corporations: a C corporation, an S corporation and an LLC, or limited liability
corporation.

Advantages of corporations include:

Owners aren't responsible for business debts: In general, the shareholders of a corporation are not
liable for its debts. Instead, shareholders risk their equity.

Tax exemptions: Corporations can deduct expenses related to company benefits, including health
insurance premiums, wages, taxes, travel, equipment and more.

Quick capital through stocks: To raise additional funds for the business, shareholders may sell shares in
the corporation.

Disadvantages include:

Double taxation for C-corporations: The corporation must pay income tax at the corporate rate before
profits transfer to the shareholders, who must then pay taxes on an individual level.

Annual record-keeping requirements: With the exception of an corporation, the corporate business
structure involves a substantial amount of paperwork.

Owners are less involved than managers: When there are several investors with no clear majority
interest, the management team may direct business operations rather than the owners.

Common examples of corporations include a business organization that possesses a board of directors
and a large company that employs hundreds of people. About half of all corporations have at least 500
employees.

Sole proprietorship

This popular form of business structure is the easiest to set up. Sole proprietorships have one owner
who makes all of the business decisions, and there is no distinction between the business and the
owner.

Advantages of a sole proprietorship include:

Total control of the business: As the sole owner of your business, you have full control of business
decisions and spending habits.

No public disclosure required: Sole proprietorships are not required to file annual reports or other
financial statements with the state or federal government.

Easy tax reporting: Owners don't need to file any special tax forms with the IRS other than the Schedule
C (Profit or Loss from Business) form.
Low start-up costs: While you may need to register your business and obtain a business occupancy
permit in some places, the costs of maintaining a sole proprietorship are much less than other business
structures.

Disadvantages include:

Unlimited liability: You are personally responsible for all business debts and company actions under
this business structure.

Lack of structure: Since you are not required to keep financial statements, there is a risk of becoming
too relaxed when managing your money.

Difficulty in raising funds: Investors typically favor corporations when lending money because they
know that those businesses have strong financial records and other forms of security.

Some typical examples of sole proprietorships include the personal businesses of freelancers, artists,
consultants and other self-employed business owners who operate on a solo basis.

Cooperative

A cooperative, or a co-op, is a private business, organization or farm that a group of individuals owns
and runs to meet a common goal. These owners work together to operate the business, and they share
the profits and other benefits. Most of the time, the members or part-owners of the cooperative also
work for the business and use its services.

Advantages of a cooperative include:

Greater funding options: Cooperatives have access to government-sponsored grant programs, like the
USDA Rural Development program, depending on the type of cooperative.

Democratic structure: Members of a cooperative follow the "one member, one vote" philosophy,
meaning that everyone has a say, regardless of their investment in the co-op.

Less disruption: Cooperatives allow members to join and leave the business without disrupting its
structure or dissolving it.

Disadvantages include:

Raising capital: Larger investors may choose to invest in other business structures that allow them to
earn a larger share, as the cooperative structure treats all investors the same, both large and small.

Lack of accountability: Cooperatives are more relaxed in terms of structure, so members who don't
fully participate or contribute to the business leave others at a disadvantage and risk turning other
members away.

Many cooperatives exist in the retail, service, production and housing industries. Examples of
businesses operating as cooperatives include credit unions, utility cooperatives, housing cooperatives
and retail stores that sell food and agricultural products.
Limited liability company

The most common form of business structure for small businesses is a limited liability company, or LLC,
which is defined as a separate legal entity and may have an unlimited amount of owners. They are
typically taxed as a sole proprietorship and require insurance in case of a lawsuit. This form of business
is a hybrid of other forms because it has some characteristics of a corporation as well as a partnership,
so its structure is more flexible.

Some advantages of an LLC include:

Limited liability: As the name states, owners and managers have limited personal liability for business
debts, whereas individuals assume full responsibility in a sole proprietorship or partnership.

Pass-through taxation: Owners of LLCs may take advantage of "pass-through" taxation, which allows
them to avoid LLC and corporation taxes, and owners pay personal taxes on business profits.

Flexible management: LLCs lack a formal business structure, meaning that their owners are free to
make choices regarding the operation of their businesses.

Some disadvantages include:

Associated costs: The start-up costs associated with an LLC are more expensive than setting up a sole
proprietorship or partnership, and there are annual fees involved as well.

Separate records: Owners of LLCs must take care to keep their personal and business expenses
separate, including any company records, whereas sole proprietorships are less formal.

Taxes: In regards to unemployment compensation, owners may have to pay it themselves.

Common examples of limited liability companies include start-ups and other small businesses. Family-
owned businesses and companies with a small number of members may operate as an LLC because it is
a flexible business model that allows members to be active or passive in their roles.