Introduction
A company is a group of people who come together for a common goal, such as running a business or supporting a social cause. In India, companies are governed by the Companies Act, 1956 (now replaced by the Companies Act, 2013).
The legal definition of a company under the Act states that a company is an entity formed and registered under the Act or under previous company laws. However, to understand the nature of a company, we need to analyze its fundamental characteristics and types.
Types of Associations
Before exploring companies in detail, it is important to differentiate between incorporated and unincorporated associations:
1. Unincorporated Association
This is an informal group of people working together without legal registration. It does not have a separate legal identity, meaning the members are personally liable for the group’s activities.
Example: A partnership firm, a club, or a group of friends running a business together.
2. Incorporated Association
This is a legally registered entity that has a separate legal existence from its members. It is recognized by law and can own property, enter contracts, and sue or be sued.
Example: Reliance Industries Limited, Tata Consultancy Services (TCS), Infosys.
Definition of a Company
Different legal scholars and laws define a company in various ways:
Lord Lindley: “A company is an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, sharing the profits or losses.”
Gower’s Example: “During World War II, all the members of one private company were killed by a bomb. Yet, the company continued to exist because it had a separate legal identity.”
Thus, a company is an artificial legal person created by law, separate from its members, with perpetual existence.
Types of Companies
Under the Companies Act, companies are categorized as follows:
1. Companies Based on Liability
Companies Limited by Shares: The liability of members is limited to the unpaid amount on their shares. Most businesses fall under this category.
Companies Limited by Guarantee: Members’ liability is limited to a specified amount they agree to pay in case of winding up.
Unlimited Companies: Members have unlimited liability for the company’s debts.
2. Private vs. Public Companies
Private Company: Restricts the transfer of shares, requires a minimum of two members, and has a maximum limit of 200 members.
Public Company: No restriction on the transfer of shares and requires a minimum of seven members with no maximum limit.
3. Other Special Types of Companies
One-Person Company (OPC): A company with only one member, introduced in the Companies Act, 2013.
Non-Profit Companies: Companies formed for charitable purposes under Section 8 of the Companies Act, 2013.
Government Companies: Where the government holds at least 51% of the share capital.
Key Features of a Company
1. Separate Legal Entity
A company is a distinct legal person separate from its owners. It can own property, enter into contracts, and sue or be sued.
2. Limited Liability
Members (shareholders) are only liable for the amount they invest. Their personal assets are protected.
3. Perpetual Succession
A company continues to exist even if its members change or pass away. It can be dissolved only through legal procedures.
4. Transferability of Shares
Shares of a company can be bought and sold freely (except in private companies).
5. Corporate Personality
A company, as a legal person, can perform functions like hiring employees, paying taxes, and signing contracts.
6. Common Seal (Prior to 2013 Act)
Earlier, companies were required to have a common seal for official documents. This is now optional.
Why Incorporate a Company?
Many people choose to incorporate a company due to its benefits:
Limited Liability: Protects personal wealth.
Ease of Raising Capital: Companies can issue shares to attract investors.
Credibility: Registered companies have higher trustworthiness.
Business Continuity: Ensures the business continues even if ownership changes.
Legal Protection: A company has rights similar to a person under the law.
Conclusion
A company is a structured and legally recognized association of individuals working towards a common business goal. Incorporation provides significant benefits such as limited liability, perpetual succession, and ease of raising funds.
By becoming an artificial legal person, a company gains the ability to operate independently of its members, making it one of the most preferred business structures worldwide.