Legal definition of the word company

Company

An organization of individuals conducting a commercial or industrial enterprise. A corporation, partnership, association, or joint stock company.

West’s Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.

company

n. any formal business entity for profit which may be a corporation, a partnership, association or individual proprietorship. Often people think the term «company» means the business is incorporated, but that is not true. In fact, a corporation usually must use some term in its name such as «corporation,» «incorporated,» «corp.» or «inc.» to show it is a corporation. (See: business)

Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill. All Right reserved.

company

an association of persons formed for the purpose of some business or undertaking, which has a legal personality separate from that of its members. A company may be formed by charter, by special Act of Parliament or by registration under the Companies Acts. The liability of members is usually (but not always) limited by the charter, Act of Parliament or memorandum of association. A company may be a public limited company (PLC or plc), in which event its shares may be transferred freely among, and owned by, members of the public. All limited liability companies that are not public limited companies are private companies, denoted by the term Ltd. While companies are owned by their members (i.e. shareholders), they are managed by a board of directors. Historically, the duties owed by the board are fiduciary in nature and owed to the company rather than the shareholders. Companies are the major instrument for economic and financial growth and development in the Western world. A limited company encourages trade to the extent that in the event of insolvency the owners are liable only to the extent of their unpaid share capital. The limited company is a legal person in its own right and is sued in place of the owners or directors.

A company may be limited by shares or, in the case of a private company, by guarantee. Since the Companies Act 1980, it is no longer possible to create a company limited by guarantee and having a share capital in the UK. A company limited by guarantee is a company that has the liability of its members limited by the memorandum of association to such an amount as the members may undertake to contribute to the assets of the company upon its being wound up. A company limited by shares is a company having the liability of its members limited by the memorandum of association to the amount, if any, unpaid on the shares respectively held by them.

Collins Dictionary of Law © W.J. Stewart, 2006

COMPANY. An association of a number of individuals for the purpose of
carrying on some legitimate business.

     2. This term is not synonymous with partnership, though every such
unincorporated compass is a partnership.

     3. Usage has reserved this term to associations whose members are in
greater number, their capital more considerable, and their enterprises
greater, either on account of their risk or importance.

     4. When these companies are authorized by the government, they are
known by the name of corporations. (q.v.)

     5. Sometimes the word is used to represent those members of a
partnership whose names do not appear in the name of the firm; as, A.B &
Company. Vide, 12 Toull. n, 97; Mortimer on Commerce, 128. Vide Club;
Corporation; Firm; Parties to actions; Partnership.

A Law Dictionary, Adapted to the Constitution and Laws of the United States. By John Bouvier. Published 1856.

From Wikipedia, the free encyclopedia

A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared goals. Companies take various forms, such as:

• voluntary associations, which may include nonprofit organizations
• business entities, whose aim is generating profit
• financial entities and banks
• programs or educational institutions

A company can be created as a legal person so that the company itself has limited liability as members perform or fail to discharge their duty according to the publicly declared incorporation, or published policy. When a company closes, it may need to be liquidated to avoid further legal obligations.

Companies may associate and collectively register themselves as new companies; the resulting entities are often known as corporate groups.

Meanings and definitions[edit]

A company can be defined as an «artificial person», invisible, intangible, created by or under law,^[1] with a discrete legal personality, perpetual succession, and a common seal. Except for some senior positions, companies remain unaffected by the death, insanity, or insolvency of an individual member.

Etymology[edit]

The English word, company, has its origins in the Old French term compagnie (first recorded in 1150), meaning a «society, friendship, intimacy; body of soldiers»,^[2] which came from the Late Latin word companio («one who eats bread with you»), first attested in the Salic law (c. AD 500) as a calque of the Germanic expression gahlaibo (literally, «with bread»), related to Old High German galeipo («companion») and to Gothic gahlaiba («messmate»).

Semantics and usage[edit]

By 1303, the word company referred to trade guilds.^[3] Usage of the term company to mean «business association» was first recorded in 1553,^[4]
and the abbreviation «co.» dates from 1769.^[5][6]

Companies around the world[edit]

China[edit]

In China, companies are often government run or government supported. Other companies may be foreign companies or export-based corporations. However, many of these companies are government regulated.^{[citation needed]}

United Kingdom[edit]

In English law and in legal jurisdictions based upon it, a company is a body corporate or corporation company registered under the Companies Acts or under similar legislation.^[7] Common forms include:

• Private companies limited by guarantee
• Community interest company
• Charitable incorporated organisation
• Private companies limited by shares — the most common form of company
• Public limited companies — companies, usually large, which are permitted to (but do not have to) offer their shares to the public, for example on a stock exchange

In the United Kingdom, a partnership is not legally a company, but may sometimes be referred to (informally) as a «company». It may be referred to as a «firm».

United States[edit]

In the United States, a company is not necessarily a corporation. For example, a company may be a «corporation, partnership, association, joint-stock company, trust, fund, or organized group of persons, whether incorporated or not, and (in an official capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent, for any of the foregoing».^[8][9]

Types[edit]

• A company limited by guarantee (CLG): Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise, they have no economic rights in relation to the company. This type of company is common in England. A company limited by guarantee may be with or without having share capital.
• A company limited by shares: The most common form of the company used for business ventures. Specifically, a limited company is a «company in which the liability of each shareholder is limited to the amount individually invested» with corporations being «the most common example of a limited company».^[9] This type of company is common in England and many English-speaking countries. A company limited by shares may be a publicly traded company or a privately held company.
• A company limited by guarantee with a share capital: A hybrid entity, usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return. This type of company may no longer be formed in the UK, although provisions still exist in law for them to exist.^[7]
• A limited liability company: «A company—statutorily authorized in certain states—that is characterized by limited liability, management by members or managers, and limitations on ownership transfer», i.e., L.L.C.^[9] LLC structure has been called «hybrid» in that it «combines the characteristics of a corporation and of a partnership or sole proprietorship». Like a corporation, it has limited liability for members of the company, and like a partnership it has «flow-through taxation to the members» and must be «dissolved upon the death or bankruptcy of a member».^[10]
• An unlimited company with or without a share capital: A hybrid entity, a company where the liability of members or shareholders for the debts (if any) of the company are not limited. In this case, the doctrine of a veil of incorporation does not apply.^{[citation needed]}

Less common types of companies are:

• Companies formed by letters patent: Most corporations by letters patent are corporations sole and not companies as the term is commonly understood today.
• Royal charter corporations: In middle-ages Europe, before the passing of modern companies legislation, these were the only types of companies.^{[citation needed]} Now they are relatively rare, except for very old companies that still survive (particularly many British banks), or modern societies that fulfill a quasi-regulatory function (for example, the Bank of England is a corporation formed by a modern charter).
• Statutory companies: Relatively rare today, certain companies have been formed by a private statute passed in the relevant jurisdiction.

When «Ltd» is placed after the company’s name, it signifies a limited company, and «PLC» (public limited company) indicates that its shares are widely held.^[11]

In the legal context, the owners of a company are normally referred to as the «members». In a company limited or unlimited by shares (formed or incorporated with a share capital), this will be the shareholders. In a company limited by guarantee, this will be the guarantors. Some offshore jurisdictions have created special forms of offshore company in a bid to attract business for their jurisdictions. Examples include segregated portfolio companies and restricted purpose companies.

However, there are many sub-categories of company types that can be formed in various jurisdictions in the world.

Companies are also sometimes distinguished for legal and regulatory purposes between public companies and private companies. Public companies are companies whose shares can be publicly traded, often (although not always) on a stock exchange which imposes listing requirements/Listing Rules as to the issued shares, the trading of shares and future issue of shares to help bolster the reputation of the exchange or particular market of an exchange. Private companies do not have publicly traded shares, and often contain restrictions on transfers of shares. In some jurisdictions, private companies have maximum numbers of shareholders.

A parent company is a company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors; the second company being deemed a subsidiary of the parent company. The definition of a parent company differs by jurisdiction, with the definition normally being defined by way of laws dealing with companies in that jurisdiction.

See also[edit]

• Corporate personhood
• List of company registers
• List of largest employers
• Lists of companies
• Stewardship
• Types of business entity

References[edit]

Further reading[edit]

• Alan Dignam and John Lowry. Company Law. Oxford: Oxford University Press, 2020. ISBN 978-0-19-928936-3.
• John Micklethwait and Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea. New York: Modern Library, 2003.
• «Company» . Encyclopædia Britannica. Vol. 6 (11th ed.). 1911. pp. 795–803.

External links[edit]

• «Labor and Employment». Government Information Library. University of Colorado at Boulder. Archived from the original on June 12, 2009. Retrieved August 5, 2009.
• «Get Information About a Company». Gov.UK.

Definition of company

Pronunciation

• SAMPA: /»kVmp@ni/
• IPA: /’kʌmpəni/
• Audio (US) ^[?]

Etymology

Old French compaignie «companionship» (French: compagnie), possibly from Late Latin *compania, but this word is not attested. Old French compaignie is equivalent to Old French compaignon (Modern French: compagnon) + -ie.

Noun

company (plural companies)

1. A group of individuals with a common purpose, as in a company of actors.
2. In legal context, an entity that manufactures or sells products (also known as goods), or provides services as a commercial venture. A corporation.
3. In non-legal context, any business, without respect to incorporation.
4. Social visitors.

   Keep the house clean, I have company coming.
5. companionship

   I treasure your company.

6. A military unit, typically consisting of two or three platoons.

   The Boys in Company C.

7. A unit of firefighters and their equipment.

   It took six companies to put out the fire.

8. (nautical) The entire crew of a ship.
9. (idiomatic) Nickname for an intelligence service.

   As he had worked for the CIA for over 30 years, he would soon take retirement from the company.

Synonyms

• corporation

Related terms

• accompany
• companion
• discompany

Further reading

A company is a form of business organization.

A company is an incorporated association, which is an artificial person created by law, having a separate legal entity, with a perpetual succession & a common seal.

In the United States, a company is a corporation-or, less commonly, an association, partnership, or union-that carries on an industrial enterprise.»[1] Generally, a company may be a «corporation, partnership, association, joint-stock company, trust, fund, or organized group of persons, whether incorporated or not, and (in an official capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent, for any of the foregoing.»

In English law, and therefore in the Commonwealth realms, a company is a form of body corporate or corporation, generally registered under the Companies Acts or similar legislation. It does not include a partnership or any other unincorporated group of persons.

A company is a natural legal entity formed by the association and group of people to work together towards achieving a common objective. It can be a commercial or an industrial enterprise. Different types of companies are taxed differently; therefore, the taxation of the company defines its type. Some of the main definitions of the company are as follows;

According to the definition of a company by the Indian Act 2013;

‘‘A
registered association which is an artificial legal person, having an
independent legal, entity with perpetual succession, a common seal for its
signatures, a common capital comprised of transferable shares and carrying
limited liability.’’

According to the US legal definition;

‘‘A
company can be a corporation, partnership, association, joint-stock company,
trust fund, or organized group of persons, whether incorporated or not, and (in
official capacity) any receiver, trustee in bankruptcy, or similar official, or
liquidating agent, for any of the foregoing.’’

According to the British definition;

‘‘A company is a body corporate or an incorporated business organization registered under the companies act. It can be limited or unlimited company, private or a public company, company limited by guarantee or a company having share capital, or a community interest company.’’

Key Features of a Company

The
key features and characteristics of a company are as follows;

Artificial person

The
law treats the company as a legal artificial person because it has its name and
bank accounts. It can also own property under its name, file a lawsuit against
other companies or personals, or be partnered up with other companies. It
performs all of the activities that a person can legally do; a company can do
it well. Therefore, it acts as an artificial individual.

Separate
Legal Entity

When
we say legal entity, what it means that it’s completely independent of its
people who control its operations. In other words, the company won’t be
responsible if its members don’t pay their debt. The same goes for the company
as well; that the members don’t have to pay for the debt of the company, if
it’s unable to pay to its creditors.

Incorporated Association

A
company starts its business operations when it is registered by the law and
under the ordinance of the companies act. The registration process of a company
is lengthy; it should have a memorandum of association, board of directors,
share prices and shareholders, a name, office, phone number, address, and other
legal documentation.

Limited Liability

The
liability of shareholders is limited to their share price only; it is in the
limited companies by share. On the other hand, in the case of limited companies
by guarantee, where the share of contributors is like an asset in the company;
if the company goes bankrupt, then the shareholders have to pay a small amounts
to cover up the loss of the company.

Common Seal

As
we know that a company acts as an artificial legal individual, therefore, it
has a stamp or seal with the name and address engraved on it. This stamp would
be like the signature of the company. The stamp and company’s seal is used for
the verification and authorization of various documents.

Perpetual Existence

Unlike
proprietorship, partnership or any other type of business, a company doesn’t
depend upon its owners, board of directors, shareholders, or employees. Many
people come and go in the company, but it stays. Therefore, the existence of
the company is much stable than

Types of Companies 

We can categorize companies based on various types like; liability, taxes, shares members and control. Some of those classifications are given below with examples;

Classification of Companies based on Liabilities

Companies Limited by Shares

As
the name implies, the liability of the company is limited to the share price of
each shareholder. Personal assets of the shareholders won’t be disturbed; their
responsibilities are limited to their debt of the company up to their share
price only.

Companies
limited by shares can be public or private.

Companies Limited by Guarantee

Companies
limited by guarantee doesn’t issue shares or have shareholder. They’re usually
non-profit organizations. If in the case of profit, the company distributes it
among its members if it’s not a charitable organization. If the company goes
bankrupt, then their liability is limited to the amount they have pre-decided
in the memorandum of the company. Guarantors are the members of the companies
limited by guarantee.

Unlimited Companies

As
the name implies the liability of the shareholders is not limited to the share
price they own, it goes beyond. They may lose their assets if the company is
unable to pay debt to its creditors. We don’t see many unlimited companies
because it involves a lot of risks.

Classification of Companies based on Members

One Person Company

One
person company is an Indian concept where one person can create a company
without having partners, board of directors or shareholders. In OPC, you’ll
have all the advantages of sole proprietorship like; you don’t have to share
profit with others, take the risk on your own without requiring approval from
others. Your liabilities are limited like a company.

OPC
has some differences with private limited companies like; you should mention
the name of a person in the memorandum of association, who’d take the charge
after your passing. The minimum capital for starting the OPC is 100,000.

ARADO
Farms, VISHRUT Biotech, and HCARE Holistic Enterprise are some of the well
known one-person companies.

Private Company

A
private company is a form of company that doesn’t offer its shares to the
public like in the public companies. The numbers of shares are limited to the
close members only. However, members can transfer their shares to anyone but
they can’t offer it to the general public.

A
private company also goes by the name of unlisted or unquoted company. Some
people think that private companies are small because they aren’t public.

Some
of the big companies like Dell (hardware and tech equipment), Virginia Atlantic
(airline), PricewaterhouseCoopers (business supplier and Service Company), Mars
(food and drink) and John Lewis Partnership (retail). These are all are the
private companies that are doing their business across the world.

Public Company

Public
companies are those that advertise their stock and shares to the general
public. People can freely trade the stock of the public company without any
restrictions. The shares of listed companies are traded in the stock exchange
market.

In
England, a public company must have a minimum of two directors and shareholders
respectively. It’s then it would fall into the category of public companies. It
should have a total share value of £50,000.

When
investors buy the stock of the company, then they become the equity owners of
the company. Some companies are private in the beginning, later they become the
public companies after fulfilling all the mandatory legal requirements.

Google, F5 Network, Chevron Corporation, Proctor and Gamble Company are some public companies; they also used to be the private companies. The reason companies move from private to public is because they need capital to expand their business operations.

Classification of Companies based on Control

Government Companies

The
economy of a country plays a very important role in managing the GDP and index.
Government companies are those that hold 51% of the share capital of the
company. The remaining 49% of the share, the company offers it to the public
and private individuals.

Mixed
Ownership Company is also the name used for the government companies. Where we
see the management and chain of hierarchy of government and technical skill of
the private sector, it’s a great mixture of both public and private sectors.

Heavy
Industry Taxila, Industrial Development Bank, Faisalabad Electric Supply
Company, and Karachi Urban Transport Corporation, PTCL, Oil, and Gas
Development Company are some of the examples of Government Companies.

Holding and Subsidiary Companies

Holding
and Subsidiary companies are two companies; where holding is a parent company
that controls the business operation of the subsidiary company. By control I
mean the holding company has a complete over the selection and election of
board of directors, it holds all the shareholders of the subsidiary company.
The subsidiary company can make its decision once it’s become independent.

Subsidiary
companies can be profit or non-profit organizations. The subsidiary company of
West’s Encyclopaedia of American Law is 2008, Thompson and Thompson, and The
Global Tutor are some of the examples of Holding and Subsidiary companies.

Associate Companies

An
associate company is the business valuation firm in which one company owns a
significant voting share of another company. The voting share usually ranges
from 20 to 50%, if it is more than 50%, then it would be subsidiary company. If
it’s less than 50%, then the owner doesn’t have to consolidate the financial
statement of associate. If it is more than 50%, then it has to consolidate the
financial statement, where the associate would consider the balance sheet as an
asset.

Conclusion

Establishing
a public or a private company is a very long process and it requires a lot of
paperwork. But the company helps you to raise capital, perhaps you won’t be
able to raise without it. Before going to take the step of a company, it’s
better to know the different types of companies and what type of company would
be best for you.

Table of Contents

1. What is a company?
2. Definition of a company
3. Characteristic features of a company
4. Lifting the corporate veil

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1. What is a company?

The word ‘company’ has no strictly technical or legal meaning (Stanley, Re [1906] 1 Ch. 131). It may be described to imply an association of persons for some common object or objects. The purposes for which people may associate themselves are multifarious and include economic as well as non-economic objectives. But, in common parlance, the word ‘company’ is normally reserved for those associated for economic purposes, i.e., to carry on a business for gain.

Used in the aforesaid sense, the word ‘company’, in simple terms, may be described to mean a voluntary association of persons who have come together for carrying on some business and sharing the profits therefrom.

Indian Law provides two main types of organisations for such associations:

• • ‘partnership’ and
  • ‘company’.

Although the word ‘company’ is colloquially applied to both, the statute regards companies and company law as distinct from partnerships and partnership law. Partnership Law in India is codified in the Partnership Act, 1932 and Limited Liability Partnership Act, 2008. Both these legislations are based on the law of agency, each partner becoming an agent of the other(s), and it, therefore, affords a suitable framework for an association of a small body of persons having trust and confidence in each other.

A more complicated form of association, with a large and fluctuating membership, requires a more elaborate organisation which ideally should confer corporate personality on the association, that is, should recognise that it constitutes a distinct legal person, subject to legal duties and entitled to legal rights separate from those of its members. This can be obtained easily and cheaply by registering an association as a company under the Act.

It should be noted that the Act even allows a company to be formed and registered for the promotion of commerce, art, science, sports, religion or charity, etc., for purposes other than profit making.

In this article, we shall limit our scope of study only to companies registered under the Companies Act, 2013 or under any of the earlier Companies Acts.

2. Definition of a company

The Act does not define a company in terms of its features.

Section 2(20) of the Companies Act, 2013 defines a company to mean a company incorporated under this Act or under any previous company law.

This definition does not clearly point out the meaning of a company. In order to understand the meaning of a company, let us see the definitions as given by some authorities.

Some popular definitions of a company

Lord Justice Lindley – “A company is an association of many persons who contribute money or monies worth to a common stock and employed in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute to it or to whom it pertains are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is often more or less restricted.”

Chief Justice Marshall – “A corporation is an artificial being, invisible, intangible, existing only in contemplation of the law. Being a mere creation of law, it possesses only the properties which the Charter of its creation confers upon it, either expressly or as incidental to its very existence.”

Prof. Haney – “A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.”

The above definitions clearly bring out the meaning of a company in terms of its features. A company to which the Companies Act applies comes into existence only when it is registered under the Act. On registration, a company becomes a body corporate i.e., it acquires a legal personality of its own, separate and distinct from its members. A registered company is, therefore, created by law and law alone can regulate, modify or dissolve it.

In G.V. Pratap Reddy Through G.P.A. TSR Research (P.) Ltd. v. K.V.V.S.N. Associates [2016] 70 taxmann.com 34 (SC), the Supreme Court of India held that where notice inviting tender (NIT) by State of Telangana required that bidder must be an individual/company, word company in NIT could only mean a company as understood under Companies Act and cannot be read to include a firm and, therefore, bid of respondent which was neither an individual nor a company but a firm was rightly rejected by State.

3. Characteristic features of a company

The most important characteristic features of a company are ‘separate legal entity’ of the company and in most cases ‘limited liability’ of its members. These and other characteristic features of a company are discussed below:—

3.1 Incorporated association

A company must be incorporated or registered under the Companies Act. Minimum number of members required for this purpose is seven in the case of a ‘public company’ and two in the case of a ‘private company’.

However, Section 3 of the Companies Act, 2013 allows formation of ‘One Person Company’ also.

3.2 Legal entity distinct from its members

Unlike partnership*, the company is distinct from the persons who constitute it. Hence, it is capable of enjoying rights and of being subjected to duties which are not the same as those enjoyed or borne by its members.

As Lord Macnaughten puts it, “the company is at law a different person altogether from the subscribers. . . . ; and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the proceeds, the company is not in law, the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.” [Salomon’s case]

Case Law: Kondoli Tea Co. Ltd., Re ILR [1886]

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The first case on the subject (even before the famous Salomon’s case) was that of Kondoli Tea Co. Ltd., Re ILR [1886].

Facts of the Case:

In this case certain persons transferred a tea estate to a company and claimed exemption from ad valorem duty on the ground that they themselves were the shareholders in the company and, therefore, it was nothing but a transfer from them in one to themselves under another name.

Decision:

Rejecting this, the Calcutta High Court observed: “The Company was a separate person; a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.”

---

The separate legal personality of the company is the bedrock of the Company Law …… – S.A.E. (India) Ltd. v. E.I.D. Parry (India) Ltd. [1998] 18 SCL 481 (Mad.).

Thus, a company can own property and deal with it the way it pleases. No member can either individually or jointly claim any ownership rights in the assets of the company during its existence or on its winding-up – B.F. Guzdar v. CIT, Bombay [1955] 25 Comp. Cas. 1 (SC).

In Rajendra Nath Dutta v. Shibendra Nath Mukherjee [1982] 52 Comp. Cas. 293 (Cal.) it was held that for any wrong done, the company must sue or be sued in its own name.

Even where a single shareholder virtually holds the entire share capital, a company is to be differentiated from such a shareholder.

Case Law: Salomon v. Salomon & Co. Ltd. [1895-99] All ER 33 (HL)

---

Facts of the Case:

In the well known case of Salomon v. Salomon & Co. Ltd. [1895-99] All ER 33 (HL), Salomon was a prosperous leather merchant. He converted his business into a Limited Company— Salomon & Co. Ltd. The company so formed consisted of Salomon, his wife and five of his children as members. The company purchased the business of Salomon for £39,000, the purchase consideration was paid in terms of £10,000 debenture conferring a charge over the company’s assets, £20,000 in fully paid £1 share each and the balance in cash. The company in less than one year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Salomon himself). And nothing was left for the unsecured creditors.

Decision:

The House of Lords unanimously held that the company had been validly constituted, since the Act only required seven members holding at least one share each. It said nothing about their being independent, or that there should be anything like a balance of power in the constitution of the company. Hence, the business belonged to the company and not to Salomon. Salomon was its agent. The company was not the agent of Salomon.

---

Case Law: Lee v. Lee’s Air Farming Ltd. [1960] 3 All ER 420 (PC)

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Facts of the Case:

‘L’ formed a company with a share capital of three thousand pounds, of which 2999 pounds were held by ‘L’. He was also the sole governing director. In his capacity as the controlling shareholder, ‘L’ exercised full and unrestricted control over the affairs of the company. ‘L’ was a qualified pilot also and was appointed as the chief pilot of the company under the articles and drew a salary for the same. While piloting the company’s plane he was killed in an accident. As the workers of the company were insured, workers were entitled for compensation on death or injury. The question was while holding the position of sole governing director, could ‘L’ also be an employee/worker of the company.

Decision:

Held that the mere fact that someone was the director of the company was no impediment to his entering into a contract to serve the company. If the company was a legal entity, there was no reason to change the validity of any contractual obligations which were created between the company and the deceased. The contract could not be avoided merely because ‘L’ was the agent of the company in its negotiations. Accordingly, ‘L’ was an employee of the company and, therefore, entitled to compensation claim.

Where a decree has been issued by the Court in respect of sums due against a company, the same cannot be enforced against its managing director – In H.S. Sidana v. Rajesh Enterprises [1993] 77 Comp. Cas. 251 (P&H).

---

Case Law: Bacha F. Guzdar v. The Commissioner of Income-Tax, Bombay (1955)

---

Facts of the Case:

Mrs. Guzdar received certain amounts as dividend in respect of shares held by her in a tea company. Under the Income-Tax Act, agricultural income is exempt from payment of income-tax. As income of a tea company is partly agricultural, only 40% of the company’s income is treated as income from manufacture and sale and, therefore, liable to tax. Mrs. Guzdar claimed that the dividend income in her hands should be treated as agricultural income up to 60%, as in the case of a tea company, on the ground that the dividends received by shareholders represented the income of the company.

Decision:

The Supreme Court held that though the income in the hands of the company was partly agricultural yet the same income when received by Mrs. Guzdar as dividend could not be regarded as agricultural income.

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In Chamundeeswari v. CTO, Vellore Rural (2007), Madras High Court held that a company being a legal entity by itself, any dues from company have to be recovered from company and not from its directors.

3.3 Artificial person

The company, though a juristic person, does not possess the body of a natural being. It exists only in contemplation of law. Being an artificial person, it has to depend upon natural persons, namely, the directors, officers, shareholders etc., for getting its various works done. However, these individuals only represent the company and accordingly whatever they do within the scope of the authority conferred upon them and in the name and on behalf of the company, they bind the company and not themselves.

3.4 Limited liability

One of the principal advantages of trading through the medium of a limited company is that the members of the company are only liable to contribute towards payment of its debts to a limited extent.

If the company is limited by shares, the shareholder’s liability to contribute is measured by the nominal value of the shares he holds, so that once he or someone who held the shares previously has paid that nominal value plus any premium agreed on when the shares were issued, he is no longer liable to contribute anything further. However, companies may be formed with unlimited liability of members or members may guarantee a particular amount. In such cases, liability of the members shall not be limited to the nominal or face value of their shares and the premium, if any, unpaid thereon.

In the case of unlimited liability companies, members shall continue to be liable till each paisa has been paid off.

In case of companies limited by guarantee, the liability of each member shall be determined by the guarantee amount, i.e., he shall be liable to contribute up to the amount guaranteed by him.

If the guarantee company also has share capital, the liability of each member shall be determined in terms of not only the amount guaranteed but also the amount remaining unpaid on the shares held by a member.

Unlimited Liability of a member of a Limited Liability company

Section 3A, inserted by the Companies (Amendment) Act, 2017, provides that if at any time the number of members of a company is reduced, in the case of a public company, below seven and in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is aware of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debt.

3.5 Separate property

Shareholders are not, in the eyes of the law, part owners of the undertaking. In India, this principle of separate property was best laid down by the Supreme Court in Bacha F. Guzdar v. CIT, Bombay (supra). The Supreme Court held that a shareholder is not the part owner of the company or its property, he is only given certain rights by law, for example, to vote or attend meetings, or to receive dividends.

Case Law: Macaura v. Northern Assurance Company Ltd. [1925] AC 619

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Facts of the Case:

In this case, Macaura held all except one share of a timber company. He had also advanced substantial amount to the company. He insured the company’s timber in his own name. On timber being destroyed by fire, his claim was rejected for want of insurable interest.

Decision:

The court observed “No shareholder has any right to any item of property owned by the company for he has no legal or equitable interest therein”.

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“. . . the property of the company is not the property of the shareholders; it is the property of the company” – Gramophone & Typewriter Ltd. v. Stanley (supra).

3.6 Transferability of shares

One particular reason for the popularity of joint stock companies has been that their shares are capable of being easily transferred. The Act in section 44 echoes this feature by declaring:

“the shares, debentures or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company”.

A shareholder can transfer his shares to any person without the consent of other members. Articles of association, even of a public company can put certain restrictions on the transfer of shares but it cannot altogether stop it.

The Companies Act, 2013 even upholds shareholders’ agreements providing for ‘Right of first offer’ and ‘Right of first refusal’ as valid even in case of a public company. What it means is that Articles of a company, whether public or private, may contain a clause that in case a member wishes to sell his shares, he will have to first offer the same to existing members. Only if they refuse to buy within the stipulated period that they can be sold to the outsiders.

However, a private company is required to put certain restrictions on the transferability of its shares but the right to transfer is not taken away absolutely even in case of a private company.

3.7 Perpetual succession

Company being an artificial person cannot be incapacitated by illness and it does not have an allotted span of life. Being distinct from the members, the death, insolvency or retirement of its members leaves the company unaffected. Members may come and go but the company can go for ever. It continues even if all its human members are dead. Even where during the war all the members of a private company, while in general meeting were killed by a bomb, the company survived. Not even a hydrogen bomb could have destroyed it. [K/9 Meat Suppliers (Guildford) Ltd., Re [1966] 1 W.L.R. 1112]. “King is dead, long live the King” very aptly applies to the company form of organisation. [Here, the first ‘King’ is used to refer to the individual monarch and the second ‘King’ refers to the office of king, i.e., the institution of monarchy.] In the above circumstances, the legal heirs of the deceased shareholders will become the members.

3.8 Common seal*

A company being an artificial person is not bestowed with a body of a natural being. Therefore, it does not have a mind or limbs of human being. It has to work through the agency of human beings, namely, the directors and other officers and employees of the company.

As per section 22, as amended by the Companies (Amendment) Act, 2015, a company may, under its common seal, if any, through general or special power of attorney empower any person to execute deeds on its behalf in any place either in or outside India. It further provides that a deed signed by such an attorney on behalf of the company and under his seal where sealing is required, shall bind the company.

In case a company does not have a common seal, the authorization shall be made by two directors or by a director and the company secretary, wherever the company has appointed a company secretary.

Again, except where expressly otherwise provided in this Act, a document or proceeding requiring authentication by a company may be signed by any key managerial personnel or an officer or employee of the company duly authorized by the Board in this behalf, and need not be under its common seal [Section 21]

4. Lifting the corporate veil

The chief advantage of incorporation from which all others follow is, of course, the separate legal entity of the company. However, it may happen that the corporate personality of the company is used to commit frauds or improper or illegal acts. Since an artificial person is not capable of doing anything illegal or fraudulent, the facade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as ‘lifting the corporate veil’. Although, in general, the courts do not interfere and essentially go by the principle of separate entity as laid down in the Salomon’s case and endorsed in many others, it may be in the interest of the members in general or in public interest to identify and punish the persons who misuse the medium of corporate personality.

In Cotton Corporation of India Ltd. v. G.C. Odusumathd [1999] 22 SCL 228 (Kar.), the Karnataka High Court has held that the lifting of the corporate veil of a company as a rule is not permissible in law unless otherwise provided by clear words of the Statute or by very compelling reasons such as where fraud is needed to be prevented or trading with enemy company is sought to be defeated.

As to when the corporate veil shall be lifted, the observations of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp. Cas. 548 (SC) is worth noting.

“While it is firmly established ever since in Salomon v. Salomon & Co. Ltd. [1897] AC 22 that a company is an independent and legal personality distinct from the individuals who are its members, it has since been held that the corporate veil may be lifted, the corporate personality may be ignored and the individual members recognised for who they are in certain exceptional circumstances. Generally, and broadly speaking the corporate veil may be lifted where the statute itself contemplates lifting the veil or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern.”

It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties who may be affected, etc.

Again, in State of U.P. v. Renusagar Power Co. [1991] 70 Comp. Cas. 127, the Supreme Court observed :

“The concept of lifting the corporate veil is a changing concept. The veil of corporate personality, even though not lifted sometimes, is becoming more and more transparent in modern jurisprudence. It is high time to reiterate that, in the expanding horizon of modern jurisprudence, lifting of the corporate veil is permissible, its frontiers are unlimited. But it must depend primarily on the realities of the situation.”

The circumstances under which the courts may lift the corporate veil may broadly be grouped under the following two heads:—

(A) Under statutory provisions

(B) Under judicial interpretations

4.1 Under statutory provisions

The veil of corporate personality may be lifted in certain cases or pierced as per express provisions of the Act. In other words, the advantage of ‘distinct entity’ and ‘limited liability’ may not be allowed to be enjoyed in certain circumstances. Such cases are :

The Companies Act, 2013 itself provides for certain cases in which the directors or members of the company may be held personally liable. In such cases, while the separate entity of the company is maintained, the directors or members are held personally liable along with the company. These cases are as follows:

4.1(A) Mis-statements in prospectus [Sections 34 & 35] – In case of misrepresentation in a prospectus, the company and every director, promoter, expert and every other person, who authorised such issue of prospectus shall be liable to compensate the loss or damage to every person who subscribed for shares on the faith of untrue statement (Sec. 35).

Besides, these persons may be punished with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud (Section 34 and Section 447 read together). However, a person may escape the aforesaid conviction if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.

4.1(B) Failure to return application money [Sec. 39] – In case of issue of shares by a company to the public, if minimum subscription, as stated in the prospectus has not been received within 30 days of the issue of prospectus or such other period as may be specified by the SEBI, then as per Rule 11 of Companies (Prospectus and Allotment of Securities) Rules, 2014, the application money shall be repaid within a period of fifteen days from the closure of the issue and if any such money is not so repaid within such period, the directors of the company who are officers in default shall jointly and severally be liable to repay that money with interest at the rate of fifteen percent per annum.

In case of default, the company and its officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

4.1(C) Misdescription of Name [Sec. 12] – As per section 12, a company shall have its name printed on hundies, promissory notes, bills of exchange and such other documents as may be prescribed. Thus, where an officer of a company signs on behalf of the company any contract, bill of exchange, hundi, promissory note, cheque or order for money, such person shall be personally liable to the holder if the name of the company is either not mentioned, or is not properly mentioned.

Case Law: Hendon v. Adelman (1973)

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Facts of the Case:

On a cheque, the name of a company was stated as ‘LR agencies limited’ whereas the real name of the company was ‘L&R Agencies Ltd.’

Decision:

The Court held the signatory directors personally liable.

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Besides, the company and its officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

4.1(D) Punishment for contravention of section 73 or section 76 [Section 76A] – Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under section 73 or section 76 or rules made thereunder or such further time as may be allowed by the Tribunal under section 73, besides the company that shall be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees; every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both. Moreover, if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall also be liable for action under section 447.

4.1(E) For facilitating the task of an inspector appointed under section 210 or 212 or 213 to investigate the affairs of the company [Sec. 219] – Section 219 provides that if an inspector appointed under section 210 or section 212 or section 213 to investigate into the affairs of a company considers it necessary for the purposes of the investigation, to investigate also the affairs of—

(a) any other body corporate which is, or has at any relevant time been the company’s subsidiary company or holding company, or a subsidiary company of its holding company;

(b) any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was, at the relevant time, the managing director or the manager of the company;

(c) any other body corporate whose Board of Directors comprises nominees of the company or is accustomed to act in accordance with the directions or instructions of the company or any of its directors; or

(d) any person who is or has at any relevant time been the company’s managing director or manager or employee,

he shall, subject to the prior approval of the Central Government, investigate into and report on the affairs of the other body corporate or of the managing director or manager, in so far as he considers that the results of his investigation are relevant to the investigation of the affairs of the company for which he is appointed.

4.1(F) For investigation of ownership of company [Sec. 216] – Under section 216, the Central Government may appoint one or more inspectors to investigate and report on the membership of any company for the purpose of determining the true persons who are financially interested in the company and who control its policy or materially influence it.

4.1(G) Fraudulent conduct [Sec. 3391] – Where in the case of winding-up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other person, or for any fraudulent purpose, those who are knowingly parties to such conduct of business may, if the Tribunal thinks it proper so to do, be made personally liable without any limitation as to liability for all or any debts or other liabilities of the company. Liability under this section2 may be imposed only if it is proved that the business of the company has been carried on with a view to defraud the creditors – Re. Augustus Barnett & Sons Ltd. [1986] B CLC 170 Ch. D.

4.1(H) Liability for ultra vires Acts – Directors and other officers of a company will be personally liable for all those acts which they have done on behalf of a company if the same are ultra vires the company.

Case Law: Weeks v. Propert [1873] L.R 8 C.P. 427

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Facts of the Case:

The directors of a railway company which had fully exhausted its borrowing powers advertised for money to be lent on the security of debentures, ‘W’ lent £500 upon the faith of advertisement and received a debenture.

Decision:

Held, the debenture was void but ‘W’ could sue the directors for breach of warranty of authority (since they had by advertisement warranted that they had the power to borrow which in fact they did not have).

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4.1(I) Liability under other statutes – Besides the Act, directors and other officers of the company may be held personally liable under the provisions of other statutes. For example, under the Income-tax Act, where any private company is wound-up and if tax arrears of the company in respect of any income of any previous year cannot be recovered, every person who was director of that company at any time during the relevant previous year shall be jointly and severally liable for payment of tax. Similarly, under Foreign Exchange Management Act, 1999, the directors and other officers may be proceeded individually or jointly for violations of the Act.

4.2 Under Judicial Interpretations

It is difficult to deal with all the cases in which courts have lifted or might lift the corporate veil. Some of the cases where the veil of incorporation was lifted by judicial decisions may be discussed to form an idea as to the kind of circumstances under which the facade of corporate personality will be removed or the persons behind the corporate entity identified and penalised, if necessary.

4.2(A) Protection of revenue – The separate entity of a company may be disregarded where revenue of the State is at stake.

Case Law: Sir Dinshaw Maneckjee Petit, Re AIR 1927 Bom. 371

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Facts of the case:

The assessee, in this case was a millionaire earning huge income by way of dividend and interest. He formed four private companies and transferred his investments to each of these companies in exchange of their shares. The dividends and interest income received by the company was handed back to Sir Dinshaw as a pretended loan.

Decision:

It was held that the company was formed by the assessee purely and simply as a means of avoiding tax and company was nothing more than assessee himself. It did no business, but was created simply as a legal entity to ostensibly receive the dividends and interest and to hand them over to the assessee as pretended loans.

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Similarly in CIT v. Sri Meenakshi Mills Ltd. AIR 1967 SC 819, where the veil had been used for evasion of taxes and duties, the court upheld the piercing of the veil to look at the real transaction.

4.2(B) Prevention of fraud or improper conduct – Where the medium of a company has been used for committing fraud or improper conduct, courts have lifted the veil and looked at the realities of the situation.

Case Law: Gilford Motor Company v. Horne [1933] 1 CH 935

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Facts of the Case:

‘Horne’ had been employed by the company under an agreement that he shall not solicit the customers of the company or compete with it for a certain period of time after leaving its employment. After ceasing to be employed by the plaintiff, Horne formed a Company which carried on a competing business and caused the whole of its shares to be allotted to his wife and an employee of the company, who were appointed to be its directors.

Decision:

It was held that since the defendant (Horne) in fact controlled the company, its formation was a mere ‘cloak or sham’ to enable him to break his agreement with the plaintiff. Accordingly, an injunction was issued against him and against the company he had formed restraining them from soliciting the plaintiff’s customers.

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Case law: Jones v. Lipman [1962] 1 All ER 442

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Facts of the Case:

Seller of a piece of land sought to evade specific performance of a contract for the sale of the land by conveying the land to a company which he formed for the purpose. Initially the company was formed by third parties, and the vendor purchased the whole of its shares from them, had the shares registered in the name of himself and a nominee, and had himself and the nominee appointed directors.

Decision:

It was held that specific performance of the contract cannot be resisted by the vendor by conveyancing of the land to the company which was a mere ‘facade’ for avoidance of the contract of sale and specific performance of the contract was therefore ordered against the vendor and the company.

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4.2(C) Determination of the enemy character of a company – Company being an artificial person cannot be an enemy or friend. However, during war, it may become necessary to lift the corporate veil and see the persons behind as to whether they are enemies or friends. It is because, though a company enjoys a distinct entity, its affairs are essentially run by individuals.

Case Law: Daimler Company Ltd. v. Continental Tyre & Rubber Co. (Great Britain) Ltd. [1916] 2 AC 307

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Facts of the Case:

A company was incorporated in London by a German company for the purpose of selling tyres manufactured in Germany. Its majority shareholders and all the directors were Germans. War between England and Germany was declared in 1914.

Decision:

It was held that since both the decision-making bodies, the Board of directors and the general body of shareholders were controlled by Germans, the company was a German company and hence an enemy company. Accordingly, the suit filed by the company to recover a trade debt was dismissed on the ground that such payment would amount to trading with enemy.

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4.2(D) Formation of subsidiaries to act as an agent –

Case Law: Merchandise Transport Limited v. British Transport Commission [1982] 2 QB 173

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Facts of the Case:

A transport company wanted to obtain licences for its vehicles, but it could not do so if it made the application in its own name. It, therefore, formed a subsidiary company and the application for licences was made in the name of the subsidiary. The vehicles were to be transferred to the subsidiary.

Decision:

Held, the parent and the subsidiary company were one commercial unit and the application for licences was rejected.

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Similarly, in the State of U.P. v. Renusagar Power Co. [1991] 70 Comp. Cas. 127, the Supreme Court held that where the holding company holds 100% shares in a subsidiary company and the latter is created only for the purpose of the holding company, corporate veil can be lifted.

The mere fact that the holding company has a subsidiary company does not imply that whenever claims are made against the subsidiary company, the corporate veil is to be pierced in order to make the holding company liable for the debts incurred by the subsidiary company. The normal rule is that independent legal personality of the company

Dive Deeper:
Registration and Characteristics of Companies
What is Companies Act, 2013?
Different Types of Companies

A society or association of persons, in considerable number, interested in a common object, and uniting themselves for the prosecution of some’commercial or industrial undertaking, or other legitimate business. Mills v. State. 23 Tex. 303; Smith v. Janesville, 52 Wis. 680, 9 N. W. 789. The proper signification of the word “company,” when applied to persons engaged in trade, denotes those united for the same purpose or in a joint concern. It is so commonly used in this sense, or as indicating a partnership, that few persons accustomed to purchase goods at shops, where they are sold by retail, would misapprehend that such was its meaning. Palmer v. Pinkham, 33 Me. 32. Joint stock companies. Joint stock companies are those having a joint stock or capital, which is divided into numerous transferable shares, or consists of transferable stock. Lindl. Partn. 6. The term Is not identical with “partnership,” although every unincorporated society is, in its legal relations, a partnership. In common use a distinction is made, the name “partnership” being reserved for business associations of a limited number of persons (usually not more than four or five) trading under a name composed of their individual names set out in succession; while “company” is appropriated as the designation of a society comprising a larger number of persons, with greater capital, and engaged in more extensive enterprises, and trading under a title not disclosing the names of the individuals. See Allen v. Long. SO Tex. 261, 16 S. W. 43, 26 Am. St. Rep. 735; Adams Exp. Co. v. Sehofield, 111 Ky. 832, 64 S. W. 903; Kossakowski v. People, 177 111. 563, 53 N. E. 115; In re Jones, 2S Misc. Rep. 356, 59 N. Y. Supp. 9S3; Attorney General v. Mercantile Marine Ins. Co., 121 Mass. 525. Sometimes the word is used to represent those members of a partnership whose names do not appear in the name of the firm. See 12 Toullier, 97

Companies Act of any country defines the word ‘company’ as a company formed and registered under the act or an existing company formed and registered under any of the previous company laws.

Company Definition

Former Chief Justice of the United States, Justice John Marshall, said, “A company is an artificial being, invisible intangible and existing only in contemplation of law.”

Definition of the company by Lord Justice Lindley is, “A company is a voluntary organization of many persons who contribute money or money’s worth to common stock and employs it in some trade or business and who share the profit or loss arising, therefore.”

Characteristics of a Company

There are some salient features that distinguished a company from other forms of business enterprises.

Following are those characteristics/features of the company:

• Incorporated Association.
• Artificial Person.
• Separate Legal Entity.
• Limited Liability.
• Separate Property.
• Transferability of Shares.
• Perpetual Existence.
• Common Seal.
• The company may sue and be sued in its name.

Incorporated Association

A Company must be incorporated or registered under the Companies Act of your country.

The minimum number required for usually starts from 5 or 7, but it varies from country to country.

Artificial Person

A company is created with the sanction of law and is not itself a human being; it is, therefore, called artificially; and since it is clothed with certain rights and obligations, it is called a person. A company is, accordingly, an artificial person.

Separate Legal Entity

Unlike a partnership, the company is distinct from the persons who constitute it. Section 34(2) says that on registration, the association of persons becomes a body corporate by the name contained in the memorandum.

Limited Liability

The company being a separate person, y its members are not as such liable for its debts.

Hence, in the case of a company limited by shares, the liability of members is limited to the nominal value of shares held by them.

Thus, if the shares are fully paid up, their liability will be nil. However, companies may be formed with unlimited liability of members, or members may guarantee a particular amount.

• In such cases, the liability of the members shall not be limited to the nominal or face value of the shares held by them.
• In the case of unlimited liability companies, members shall continue to be liable until each dollar has been paid off.
• In case of companies limited by guarantee, the liability of each member shall be determined by the guaranteed amount, i.e., he shall be liable to contribute up to the amount guaranteed by him.

Separate Property

Shareholders are not, in the eyes of the law, part owners of the undertaking.

The Supreme Court held that a shareholder is not the part-owner of the company or its property; he is only given certain rights by law, e.g., to vote or attend meetings, to receive dividends.

Transferability of Shares

Since business is separate from y its members in a company form of organization, it facilitates the transfer of members’ interests.

The shares of a company are transferable in the manner provided in the Articles of the company.

However, in a private company, certain restrictions are placed on such transfer of shares, but the right to transfer is not taken away absolutely.

Perpetual Existence

A company being an artificial person cannot be incapacitated by illness, and it does not have an allotted span of life.

The death, insolvency, or retirement of its members leaves the company unaffected. Members may come and go, but the company can go forever.

Common Seal

A company is an artificial person is not bestowed with a body of natural being. Therefore, it has to work through its directors, officers, and other employees.

But, it can be held bound by only those documents which bear its signatures. The common seal is the official signature of a company.

The company may sue and be sued in its name.

Another fall-out of separate legal entity is that the company if aggrieved by some wrong done to it, may sue or be sued in its name.

Advantages of Company Form of Business

This is because there are many advantages which the company form of business organization enjoys over other forms of business organization.

The main advantages of Company business form are:

• Large Financial Resources.
• Professional Management.
• Large-scale Production.
• Contribution to Society.
• Research and Development.

Let us read about those advantages:-

Large Financial Resources

A joint-stock company can collect a large amount of capital through small contributions from a large number of people.

In public limited companies, shares can be offered to the general public to raise capital. They can also accept deposits from the public and issue debentures to raise funds.

Limited Liability

In the case of a company, the liability of its members is limited to the extent of the value of shares held by them. The private property of members cannot be attached to the debts of the company.

This advantage attracts many people to invest their savings in the company, and it encourages the owners to take more risks.

Professional Management

Management of a company is vested in the hands of directors, who are elected democratically by the members or shareholders.

These directors, as a group known as Board of Directors (or simply Board), manage the affairs of the company and are accountable to all the members.

So members elect capable persons having to sound financial, legal, and business knowledge to the board so that they can manage the company efficiently.

Large-scale Production

Due to the availability of large financial resources and technical expertise, companies can have large-scale production. It enables the company to produce more efficiently and at a lower cost.

Contribution to Society

A joint-stock company offers employment to a large number of people. It facilitates the promotion of various ancillary industries, trade, and auxiliaries to trade.

Sometimes it also donates money towards education, health, and community services.

Research and Development

Only in company form of business, it is possible to invest a lot of money on research and development for improved processes of production, new design, better quality products, etc.

It also takes care of the training and development of its employees.

Although a Sole Proprietor enjoys more advantages than any other form of business, entrepreneurs are found eager enough to expand their venture up to Joint-Stock Company motivated by the above advantages.

Disadvantages of Company Form of Business

Despite many advantages of the company form of business organization, it also suffers from some limitations.

Let us note the limitations of Joint Stock Companies.

• Difficult to form.
• Excessive government control.
• Delay in policy decisions.
• The concentration of economic power and wealth in a few hands.

Difficult to form

The formation or registration of a joint-stock company involves a complicated procedure. Several legal documents and formalities have to be completed before a company can start its business.

It requires the services of specialists such as Chartered Accountants, Company Secretaries, etc. Therefore, the cost of formation of a company is very high.

Excessive government control

Joint-stock companies are regulated by the government through the Companies Act and other economic legislations.

Particularly, public limited companies are required to adhere to various legal formalities as provided in the Companies Act and other legislation.

Non-compliance with these invites heavy penalties. This affects the smooth functioning of office companies.

Delay in policy decisions

Generally, policy decisions are taken at the Board meetings of the company. Further, the company has to fulfill certain procedural formalities.

These procedures are time-consuming and, therefore, may delay action on the decisions.

The concentration of economic power and wealth in a few hands

joint-stock companies is a large-scale business organization having huge resources. This gives a lot of economic and other power to the persons who manage the company.

Any misuse of such power creates unhealthy conditions in the society, e.g., having a monopoly over a particular business or industry or product, exploitation of workers, consumers, and investors.

Suitability of Company Form of Business

A joint-stock company form of business organization is found to be suitable where the volume of business is large and huge financial resources are needed.

Since members of a company have limited liability, it is possible to raise capital from the public without much difficulty.

This form of organization is also suitable for businesses that involve heavy risks.

Again, for business activities that require public support and confidence, a joint-stock form is preferred as it has a separate legal status.

Certain types of businesses, like the production of pharmaceuticals, machine manufacturing, information technology, iron and steel, aluminum, fertilizers, cement, etc., are generally organized in the form of a Company.

Final Words:

A company may be an association of persons, associate together to carry on a lawful business with a view of profit.

Companies may be;

1. companies limited by shares,
2. companies limited by guarantee, and
3. unlimited companies.

Read our article on types of companies to understand how companies are classified.

The vast majority of companies are with limited liability by shares. 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.” Shares in a company are transferable.

What Is a Company?

A company is a legal entity formed by a group of individuals to engage in and operate a business—commercial or industrial—enterprise. A company may be organized in various ways for tax and financial liability purposes depending on the corporate law of its jurisdiction.

The line of business the company is in will generally determine which business structure it chooses such as a partnership, proprietorship, or corporation. These structures also denote the ownership structure of the company.

They can also be distinguished between private and public companies. Both have different ownership structures, regulations, and financial reporting requirements.

How a Company Works

A company is essentially an artificial person—also known as corporate personhood—in that it is an entity separate from the individuals who own, manage, and support its operations. Companies are generally organized to earn a profit from business activities, though some may be structured as nonprofit charities. Each country has its own hierarchy of company and corporate structures, though with many similarities.

A company has many of the same legal rights and responsibilities as a person does, like the ability to enter into contracts, the right to sue (or be sued), borrow money, pay taxes, own assets, and hire employees.

Advantages and Disadvantages of Starting a Company

The benefits of starting a company include income diversification, a strong correlation between effort and reward, creative freedom, and flexibility. Another advantage of companies is that they create jobs. If an individual starts a company and it grows, most often they have to hire employees. This increases the number of jobs available in a nation, employs people, reduces unemployment, and brings wealth into the economy.

There is often a tremendous amount of personal satisfaction garnered from starting your own company. This involves following your dreams and passions and leaving a legacy.

The disadvantages of starting a company include increased financial responsibility, increased legal liability, long hours, health risks due to stress, responsibility for employees and administrative staff, regulations, and tax issues.

There is a tremendous amount of risk in starting a company, from the time invested and, therefore, opportunity cost from not working a salaried job, to financial risk. Failure is of course one of the biggest disadvantages; however, many successful entrepreneurs attest that their first businesses failed and that the experience was an important learning tool.

Many of the world’s largest personal fortunes have been amassed by people who have started their own companies.

Types of Companies

In the United States, tax law as administered by the Internal Revenue Service (IRS) and individual states dictates how companies are classified. Examples of company types in the U.S. include the following:

• Partnerships are formal arrangements in which two or more parties cooperate to manage and operate a business.
• Corporations are legal entities that are separate and distinct from their owners and provide the same rights and responsibilities as a person
• Associations are vague and often misunderstood legal entities based on any group of individuals who join together for business, social, or other purposes as a continuing entity. (This may or may not be taxable depending on structure and purpose.)
• Funds are businesses engaged in the investing of pooled capital of investors.
• Trusts are fiduciary arrangements in which a third party holds assets on behalf of beneficiaries.

A company may also be described as an organized group of persons—incorporated or unincorporated—engaged in an enterprise.

Company vs. Corporation

In the U.S., a company is not necessarily a corporation, though all corporations can be classified as companies via a variety of structures. For example, U.S. corporate structures include sole proprietorships, general partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), limited liability corporations (LLCs), S corporations, and C corporations.

A corporation is a type of business that is distinct from its owner. This means they require regular tax filings to be submitted separately from the personal taxes of their owners. Corporate ownership is determined by how much stock its shareholders hold. These shareholders may make decisions on how the company is managed, or they may choose a team of directors to do so.

Some of the most successful corporations in the United States include Amazon, Apple, McDonald’s, Microsoft, and Walmart.

Public vs. Private Companies

Companies can be divided into two distinct categories for both legal and regulatory purposes: Public and private companies.

A public, or publicly-traded company allows shareholders to be equity owners when they purchase shares through a stock exchange. Someone who owns a large number of shares has a larger stake in the company compared to someone who has a small number of shares.

Shares are first issued through an initial public offering (IPO) before trading begins on a secondary exchange. Apple, Walmart, Coca-Cola, and Netflix are all examples of public companies.

Public companies are held to strict reporting and regulatory requirements by the U.S. Securities and Exchange Commission (SEC). Under these guidelines, companies must file financial statements and reports annually outlining the financial health of the company. This prevents fraudulent reports and activities.

Private companies, on the other hand, are held under private ownership. Although they may issue stock and have shareholders, equity in private companies is not traded on an exchange. They vary in shape and size and are not always bound by the strict regulations and reporting requirements to which public companies must adhere.

These companies do not have to disclose financial information or outlook to the public, giving them more opportunity to focus on long-term growth rather than quarterly earnings. Examples of private companies include Koch Industries, candy maker Mars, car rental company Enterprise Holdings, and accounting firm PriceWaterhouseCoopers.

The Bottom Line

A company is a legal entity created by an individual or group of individuals to conduct a business enterprise, which is usually the sale of a business or product that is needed or desired by society. Companies have been around for hundreds of years and there are many different types, depending on the size, scope, and goals of each.

Starting a company is a risky endeavor as the chance of failure is high. Even the most successful companies do not last forever if they cannot evolve with the times. Companies are the primary source of employment in most nations and, therefore, an important contributor to the economic health of most countries.

Meaning and Definition of a Company

“Company” in the common usage refers to a voluntary association of individuals formed for the purpose of attaining a common social or economic end. Strictly speaking, the term “Company” has no technical or legal meaning. In the common law, a company is a juristic personality or legal person separate from its members. Thus, it exists only in the contemplation of law.

Image: Company – Meaning, Definition, Characteristics

In other words, a company is an artificial or legal person created and devised by the laws for a variety of purposes such as promotion of charity, art, research, religion, commerce or business. The company, just like a natural person possesses similar rights and owes similar obligations, but has neither a mind nor a body of its own.

Eminent scholars and writers have defined the term. Some of the definitions are give below:

Definition of Yale Law Journal: “A company is an intricate, centralized, economic, administrative structure run by professional managers who hire capital from the investors”.

Characteristics of a Company

The definitions quoted above illuminate the principal attributes of a company, otherwise known as a corporation. They are given below:

1. Legal Personality

The law divides person into two kinds viz.,

1. natural persons, and
2. legal persons.

Natural persons are human persons such as men, women, children etc. The natural persons are the creations of nature.

Legal persons or artificial persons, on the other hand, are created and devised by human laws i.e. created by a legal process and not through natural birth. An artificial person, though abstract, invisible and intangible, can do everything like a natural person except a few acts, which only natural persons can do.

A company is a distinct legal person, existing independent of its members. The independent corporate existence is the outstanding feature of a company.

2. Limited Liability

The principle of limited liability is a feature as well as a privilege of the corporate form of enterprise. In other words, the liability of the members is limited. It means that the shareholders enjoy immunity from liability beyond a certain limit. A shareholder cannot be called upon to pay anything more than the unpaid value
of the share that he has undertaken to pay under a contract between himself and the company.

3. Perpetual Succession

As a juristic person, a company enjoys perpetual succession. In other words, a company never dies, nor its life depends on the life of its members. Even if all the members die, it shall not affect the privileges, immunities, estates and possessions of the company.

4. Right to Property

A company, being a legal person has a right to acquire, possess and dispose of property in its own name. Its property is not that of the shareholders. Although the members contribute the capital and assets of company, the property of the company will not be considered as the joint property of the members constituting the company.

5. Common Seal

The common seal is considered as the Official Signature of the company. Its common seal must authenticate all the acts. When common seal is affixed on a document, it is considered as the authoritative document of the company. The secretary of the company should keep the seal under lock and key. He should make use of it only according to the directions of the Board of Directors.

6. Transferability of Shares

The capital of a company is divided into several small parts known as shares.The primary objective of joint stock companies is that it should be able to transfer shares easily. The law also considers the share of a company as movable property and hence like any other movable asset, the shareholder can transfer his title over his share to some other person.

7. Capacity to Sue and be Sued

A company being a legal person, can sue other persons in its corporate name. Similarly, others can also sue the company in their own name. It can also be fined for contravening any law but it cannot be imprisoned for a criminal offense.

8. Not a Citizen

Although a company is a legal person, it is not a citizen under the Indian Constitution. It can act only though natural persons.