Company – Meaning, Characteristics, Kinds and Formation

What is a Company?

According to Section 2 (20) of the Companies Act 2013, “Company means a company incorporated under this Act or any previous Company Law”.

In other words, a Company is an amalgamation of individuals who, with a common purpose, contribute funds and establish a distinct legal entity. So, a Company is an artificial person that is created by law and has a separate, legal entity, perpetual succession, common seal, and a limited liability. It is a voluntary association of people who come together to contribute to the capital of the company to do business.

Despite its distinct features, the Supreme Court of India, in the case of State Trading Corporation of India v/s CTO clarified that a company cannot have the status of a citizen under the Constitution of India.

Geeky Takeaways:

• A company is a legal entity that is formed by a group of individuals to engage in and operate a business organization in a commercial or industrial capacity.
• The business line of a company depends on its structure, which can range from a partnership to a proprietorship or even a corporation.
• A company is purposely organized to earn profits from running its business.

Characteristics of a Company

1. Distinct Legal Entity: Upon legal incorporation, a company obtains a separate legal identity, independent of its members. It can hold property, incur debts, and engage in contracts in its name.

2. Limited Liability: Members’ liability is confined to their contributions, protecting them from personal liability beyond their share value. This contrasts with unlimited liability in partnerships.

3. Continual Existence: A company persists unless dissolved, or it achieves its objectives. Changes in membership don’t impact its existence.

4. Ownership Distinction: Company property is distinct from member’s assets and a member cannot claim ownership of a company’s asset.

5. Share Transferability: Shares can be transferred, subject to conditions, allowing flexibility for shareholders.

6. Common Seal: Essential for agreements, the common seal is the company’s authorized signature, ensuring legal validity.

7. Legal Capacity to Sue and Be Sued: A company can initiate or respond to legal actions independently.

8. Separate Management: Management responsibilities lie with the Board of Directors, separate from shareholders.

9. One Share-One Vote Principle: Voting is based on the number of shares held, emphasizing a democratic process.

Kinds of Companies

There are various companies in the Indian market which contribute to the economic growth and development towards the nation. Section 2 of the Companies Act, 2013 defines various kinds of companies and their classification based on Incorporation, Liability, Members, Domicile, etc. Major classifications are explained as follows:

A. Classification Based on Incorporation

1. Chartered Companies: Companies established before independence are often known as Sovereign Companies. For example, The East India Company, a chartered company granted royal privileges for trade and played a significant role in India’s colonial history.
2. Statutory Companies: Entities created by a specific act of Parliament or State Legislature. For example, The Reserve Bank of India, established under the Reserve Bank of India Act, 1934, is a statutory company with a defined legislative mandate.
3. Registered Companies: Companies registered under the Companies Act, 2013, or earlier Acts. For example, Infosys Limited, a prominent Indian IT company, is registered under the Companies Act, 1956.

B. Classification Based on Liability

1. Unlimited Liability Company: Members are personally responsible for company debts. For example, A small partnership firm where partners are individually responsible for all debts.
2. Companies Limited by Guarantee: Members guarantee payment of debts during winding up. For example, Non-profit organizations often adopt this structure, where members commit to covering financial obligations in case of dissolution.
3. Companies Limited by Shares: Members liability is limited to the unpaid value of shares. For example, Most publicly traded companies, like Reliance Industries Limited, fall into this category.

C. Classification Based on Members

1. Public Company: Not private, with a minimum paid-up share capital. For example, Tata Consultancy Services (TCS), listed on stock exchanges, is a public company.
2. Private Company: Limited membership, restricting share transfer. For example, Wipro Limited, with fewer shareholders and restricted share transferability, is a private company.
3. One Person Company (OPC): Allows a single-individual establishment, promoting a corporate structure for small businesses. For example, A freelance consultant establishing a company with only themselves as the sole member represents an OPC.

Company Formation under The Companies Act, 2013

A company can be formed by subscribing to a Memorandum of Association (MOA). Minimum person required to form a Company varies in different kinds of companies, such as:

• Public company: Seven or more persons.
• Private company: Two or more persons.
• One Person Company: One person, with provision for nomination.

Relevance of Incorporation

• Shield from Liability.
• Establish Perpetual Existence and Transfer of Ownership.

Incorporation Procedure: Section 7 of the Companies Act, 2013

Section 7 of the Companies Act, 2013 defines Incorporation Procedure. It prescribes documents and information needed, such as:

1. Memorandum and Articles of Association.
2. Declarations confirming legal compliance.
3. Correspondence address and member details.
4. First directors’ interests and consent.

Registration Process:

• Submit documents to the Registrar.
• Registrar registers and issues a Certificate of Incorporation.
• Corporate Identity Number (CIN) is allotted.
• Keep copies at the registered office.

Memorandum of Association (MOA)

MOA is a foundational document defining the company’s relationship with shareholders, specifying objectives. It includes:

• Name Clause
• Situation/Registered State Clause
• Object Clause
• Liability Clause
• Capital Clause
• Subscriber Clause

Articles of Association (AOA)

AOA, regulating internal affairs, includes regulations, matters inclusion, provisions for entrenchment, and outlines director appointment and removal.

Director Appointment and Removal

Appointment under Companies Act, 2013:

• Board of directors required, with a maximum of 15 directors.
• Appointment by nomination, voting, proportional representation, or tribunal.
• Special resolution for more than 15 directors.

Removal under Companies Act:

• Draft notice and resolutions for a board meeting.
• Inform the director about potential removal.
• Send notices and agenda to all directors.
• Hold a board meeting and pass a removal resolution.
• Notify members of the general meeting.
• Special notice signed by members with at least 1% voting power.
• Hold a general meeting, allowing the director to address the situation.
• Complete necessary documentation.

Director Removal Documentation: Forms required are MGT-14 and DIR-12.

Conclusion

Incorporation laws protect business ideas, ensuring rights, privileges, and transparency. The Companies Act, 2013, safeguards companies and shareholders, fostering mutual protection and transparency in business operations.

Frequently Asked Questions (FAQs)

1. What is a company, and how does it differ from other business structures?

Answer:

A company is a distinct legal entity formed by individuals for a common purpose. Unlike other structures, it has a separate legal identity, limited liability for members, and perpetual existence.

2. What are the defining characteristics of a company under Indian law?

Answer:

Key characteristics include a distinct legal entity, limited liability, continual existence, ownership distinction, share transferability, common seal usage, legal capacity to sue and be sued, separate management and adherence to the one share-one vote principle.

3. How are companies classified under Indian law based on incorporation?

Answer:

Companies are classified into Chartered, Statutory, and Registered companies. Chartered companies were established before independence, statutory companies are created by specific Acts, and registered companies are incorporated under the Companies Act, 2013.

4. What is the significance of liability in different types of companies?

Answer:

Companies can be unlimited liability, limited by guarantee, or limited by shares. Unlimited liability companies hold members personally responsible, while limited companies restrict liability to the unpaid value of shares.

5. How does the Companies Act, 2013 classify companies based on members?

Answer:

It classifies companies into Public, Private, and One Person Companies. Public companies have a minimum paid-up capital, private companies limit membership and share transfer, and One Person Companies allow single-individual establishments.

6. What is the process for forming a company under the Companies Act, 2013?

Answer:

The process involves subscribing to a memorandum, with a minimum required number of persons. Public companies require seven or more, private companies need two or more, and One Person Companies can be formed by a single individual.

7. Why is incorporation relevant, and what advantages does it offer?

Answer:

Incorporation shields individuals from liability, establishes perpetual existence, and facilitates the transfer of ownership. It provides legal protection and structure to business operations.

8. What documents and information are needed for the incorporation of a company?

Answer:

Required documents include the memorandum and articles of association, declarations confirming legal compliance, correspondence address, member details, and first directors’ interests and consent.

9. What is the Memorandum of Association (MoA), and what does it include?

Answer:

MoA is a foundational document specifying the company’s relationship with shareholders and objectives. It includes clauses, such as the name, registered state, objectives, liability, capital, and subscriber details.

10. What is the significance of Articles of Association (AoA) in a company?

Answer:

AoA regulates a company’s internal affairs, outlining rules for management, inclusion of matters, provisions for entrenchment, and details on director appointment and removal. It complements the Memorandum of Association in guiding company operations.