What do you understand by a Company? State its features and types.

 

COMPANY FORM OF ORGANISATION

The sole proprietorships and partnerships have the disadvantages of limited resources, unlimited liability, limited managerial skills, etc. The life and stability of these organisations also depend on the life and stability of the proprietors/partners. Hence, they are not considered suitable for large scale business.

 For large scale business, you require large investment and specialised managerial skills. The element of risk is also very high. This situation led to the emergence of company form of business organisation. In case of joint stock company, capital is contributed by not one or two persons but by a number of persons called shareholders. Thus, it is possible to raise large amount of capital. A joint stock company is an association of persons registered under Companies Act for carrying on some business. It is called an artificial person as it is created by law, with a distinctive name, a common seal and perpetual succession of members. It can sue and be sued in its own name. The most widely quoted definition of a company (called Corporation in USA) is the one given by Chief Justice Marshal. According to him "a corporation is an artificial being, invisible, intangible and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or an incidental to its very existence." Lord Justice Lindley has defined it as "an association of mane' persons, who contribute money or money's worth to a common stock and employ it for a 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 member is entitled is his share.

" The Indian Companies Act (1956) defines joint stock company as "a company limited by shares having a permanent paid up or nominal share capital of fixed amount divided into shares, also of fixed amount, held and transferable as stock and formed on the principles of having in its members only the holders of those shares or stocks and no other persons."

 

Main Features

Based on the above definitions, we can list out the features of the company form of organisation as follow:

1-      Incorporation: A company is an incorporated association. It comes into existence after registration under the Companies Act.

2-      Artificial person: A company is regarded as an artificial person as it is created by law and can be effaced only by Iaw. It has no body, no soul, no conscience, still it is in a position to exist. Like any other person it can own property, conduct a lawful business, enter into contracts with others, buy, sell and hold property, all under its own name and its own seal.

3-      Separate legal entity: A company has a distinct entity separate from its members. A shareholder of a company, can enter into contract with the company and can sue the company and be sued by it. You know that in the case of partnership, every partner is an agent of the firm and also that of the other partners. But the shareholder is not the agent of the company or its shareholders. He cannot bind them with his acts.

4-       Common seal: As the company is not a natural person, it cannot sign the documents. It has a device in the form of common seal on which its name is engraved. This common seal is a substitute of its signatures. It is affixed on all important legal documents and contracts. It is used at the direction of the board of directors and two directors have to sign as witnesses wherever it is affixed on any document.

5-      Perpetual succession: A joint stock company has a continuous existence. Its life is not affected by the death, lunacy, insolvency or retirement of its shareholders or directors. Members may come and go, but the company continues its operations until it is legally dissolved. Thus, a company has perpetual succession irrespective of its membership. This feature provides stability to this form of organisation.

6-      Separation of ownership and management: The shareholders of a company are widely scattered throughout the country. For the conduct of the business and its management, shareholders elect another set of persons known as directors. The right to manage the company affairs is vested in the directors who are elected representatives the shareholders. Thus, ownership is separated from management.

7-      Number of members: In the case of a public limited company; the minimum number is seven and there is no maximum limit. In the case of a private limited company. minimum number is two and the maximum is fifty.

8-      Limited liability: The liability of the members of a company is normally limited by guarantee or by the shares. Members liability is limited to the amount of shares held. Members are not personally liable for the debts of the company. So, personal properties of the members are not liable to be attached for the payment of the company's debts. For example, the face value of the share of a company is Rs. 10 which the member has already paid. At the time of winding up of the company, the member cannot be asked to pay any money. But if the member had paid only Rs.7, he can at the most be asked to pay the balance of Rs. 3 (face value Rs.10 minus money paid Rs. 7), and no more.

9-      Transferability of shares: The member of a public limited company enjoys a statutory right to sell his shares to others without the consent of other shareholders. But for transferring the shares he has to follow the procedure laid down in the Companies Act. However, there are restrictions for transferring shares in case of a private limited company.

10-   Regidity of objects: The scope of the business of a company is limited. The type of business in which the company would participate is mentioned in the 'object clause' of its Memorandum of Association. The company cannot take up any new business without changing the object clause. To change the object clause, the company has to comply with the provisions of the Companies Act.

11-   Statutory regulations: A company is governed by the Companies Act and it has to follow various provisions of the Act. It has to submit a number of returns to the Government. Accounts of a company must be audited by a Chartered Accountant. Thus, the company form of organisation has to comply with numerous and varied statutory requirements.

Having studied the features of a joint stock company you can easily make out that the shareholders are the real owners of the company. Their liability is limited. They can also transfer their shares to others. Since the shareholders are very large in number, the company cannot be managed by all. They elect a board of directors to manage the company. The destiny of the company is guided and directed by the directors. These directors employ some people to carry on the day-to-day business of the company. The company can raise additional funds by issuing debentures (also called bonds).

Classification of Companies

 We can classify companies on the basis of I) Mode of incorporation, 2) Extent of liability, 3) Category of shareholders and 4) Jurisdiction of functioning. Look at Figure 2.3 for the classification of companies.

1 On the basis of the mode of incorporation, we can classify companies into three categories:

 a) Statutory Company: A company established by a special Act of the Parliament or State Legislature is called 'Statutory Company'. Such companies are established in special cases when it is necessary to regulate the working of the company for some specific purposes. Examples of such corporations are Reserve Bank of India, Life Insurance Corporation of India, Air India Corporation, Food Corporation of India, etc. These are mostly public sector enterprises.

b) Registered Company: A company which is incorporated through registration with the Registrar of Companies under the Companies Act, 1956, is called a 'Registered Company'. This is also called 'Incorporated Company'. All companies established under the private sector belong to this category.

c) Chartered Company: A company which is incorporated under a special Royal Charter granted by the Monarch is called a 'Chartered Company'. It is regulated by the provisions of that charter. Examples arc: British East India Company, Bank of England, Hudson's Bay Company, etc. In India this type of companies does not exist now because there is no monarchy.

2 Based on the type of liability, companies may be classified into three categories:

a) Unlimited Companies: A company in which the liability of the members is unlimited, is called 'Unlimited Company'. At the time of winding up of the company shareholders have to pay, if necessary, from their personal assets to clear the company's debts. From this point of view, it is very much like sole proprietorship and partnership. However, such companies are very rare.

b) Companies Limited by Guarantee: In the case of some companies, members give guarantee for the debts of the company up to a certain limit in addition to the amount of shares held by them. The additional amount guaranteed by the members is generally, laid down in the Memorandum of Association. Such companies are not formed for the purpose of profit. They are formed to promote art, culture, religion, trade, sports, etc. Clubs, Charitable organisations, trade association. etc. come under this category.

c) Companies Limited by Shares: In this case the liability of the members is limited to the amount of the shares held by them. A shareholder can be called upon to pay only the unpaid amount of shares held by him and nothing more. Most of the companies come under this category.

 3 On the basis of the ownership, companies may be classified into three categories:

a) Private Limited Company: A private limited company means a company which by its article

i)                    restricts the right to transfer its shares;

ii)                    limits the number of its members to fifty; and

iii)                 prohibits any invitation to the public to subscribe for any shares or debentures the company.

b) Public Limited Company: A public limited company is one which is not a private limited company. A company having the following characteristics should be called a public limited company.

i) The right of the shareholder to transfer his shares is not restricted.

ii) The minimum number of shareholders is 7 but there is no limit to the maximum number of members.

iii)It can invite public to subscribe for its shares and debentures.

The minimum number of members in the case of a private limited company is two all,' can be formed more easily as compared to a public company. It is exempted from various regulations of the Companies Act and thus combines the advantages of limit, liability and the facilities of a partnership organisation. It is considered suitable for medium sized business.

c) Government Company: A company in which not less than S I per cent of the p up share capital is held by the Central Government, or by any State Government jointly by Central and/or State Governments.

4 On the basis of the jurisdiction of the functioning, we can classify companies Into two categories :

a) National Company: When the operations of a company are confined within the boundaries of the country in which it is registered, such a company is called a national company.

b) Multinational Company: When the operations of a company are extended bet, the boundaries of the country in which it is registered, such a company is called multinational Company. It is also called 'transnational company