MEANING, CHARACTERISTICS AND TYPES OFA COMPANY

STRUCTURE
1.0 Objective
1.1 Introduction
1.2 Meaning of Company
1.3 Characteristics of a Company
1.4 Distinction between Company and Partnership
1.5 Types of Company

INTRODUCTION
Large-scale corporate organisations have emerged as a result of the industrial revolution. These
organisations need significant financial outlays, and the danger is very high. Two significant restrictions
of this are limited resources and partners' unlimited liability. relationships among partnerships in large-
scale business endeavours. Due to its ability to address certain issues, the Joint Stock Company type of
corporate organisation has grown incredibly popular.conquer the constraints of a joint business. Investors
and consumers of multinational corporations such as General Motors and Coca-Cola are dispersed across
the globe. Reliance, Talco Bajaj Auto, Infosys Technologies, Hindustan Lever Ltd., Ranbaxy
Laboratories Ltd., Larsen and Tubro, and other well-known Indian corporations may be among them.

MEANING OF COMPANY

A company is defined as "a company formed and registered under this Act or an existing company" in
Section 3 (1) (i) of the Companies Act, 1956. "An existing company means a company formed and
registered under any of the previous companies laws," according to Section 3(1)(ii) of the act. It is not
clear from this definition what makes a company unique. "A company is a person, artificial, invisible,
intangible, and existing only in the contemplation of the law," states Chief Justice Marshall of the United
States. Its only attributes are those that the nature of its creation, either explicitly or indirectly, bestows
upon it as a result of its own being, since it is merely a product of law.
Lord Justice Lindley provides another thorough and precise definition of a company: "A company is
meant to be an association of numerous people who contribute capital or capital worth to a common stock
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and use it in some trade or business, and who share the profit and loss (as the case may be) arising
therefrom." The contributed common stock is the company's capital and is expressed in monetary terms.
Members are those who provide it or to whom it belongs. Each member's share is the amount of capital to
which they are entitled. Although the ability to transfer shares is frequently somewhat limited, shares are
always transferable.
As per Haney, a Joint Stock Company is an autonomous group of people that get together for financial
gain, and their capital is separated into shares that may be transferred. Which possession is required in
order to be a member.Based on the aforementioned definitions, it can be inferred that a company is a
registered association, which is a type of artificial legal person with limited liability, a common capital
consisting of transferable shares, and an autonomous legal entity with perpetual succession.

CHARACTERISTICS OFA COMPANY

The primary attributes of an organisation consist of:

Association with incorporation: S

The act of registering a business under the Companies Act creates it. As stated in the certificate of
incorporation, it becomes operative on that day. It is important to note that Section 11 states that any
association consisting of more than ten people conducting banking business or more than twenty people
conducting any other kind of business must register with the Companies Act. If it does not, it will be
considered an illegal association. A minimum of two individuals are needed to start a private company, while
a minimum of seven individuals are needed to form a public corporation. These individuals will sign the
memorandum of association and adhere to all other Act-mandated legal formalities regarding the formation
and incorporation of a business, whether or not limited liability is involved [Sec. 12 (1)].

A synthetic legal entity:

A company is a synthetic individual. In other words, it is not a normal individual. It cannot act
independently; it only exists in the eyes of the law. It must operate through a board of directors that is
chosen by the stockholders. "The board of directors are the brains and the only brains of the company,
which is the body and the company can and does act only through them," as was correctly noted in Bates
v. Standard Land Co. However, a company is a legal person in many ways, just like a natural person. It is
able to purchase and sell property, make agreements with third p third parties under its own name, file
lawsuits, and be Sued in its own name. It cannot, however, exercise the privileges granted by the
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Citizenship Act or the Indian Constitution, making it non-citizen. It was decided in State Trading
Corporation of India v. C.T.O. (1963 SCJ 705) that it is not subject to the Citizenship Act's or the
Constitution's provisions. It is important to remember that, although not having any fundamental rights, a
company is nonetheless considered a person in legal terms. It is able to sign agreements with outside
parties, its members, and its directors.
According to a statement made by Justice Hidayatullah, a firm does not become an Indian citizen only
because all of its members are Indian nationals.arties under its own name, file lawsuit.

Independent Legal Entity:

A company is separate from its members and has its own legal identity. Only the business and its assets
may be used by the company's creditors to recoup their losses. Individual members are not subject to
lawsuits. The business is also not responsible in any manner for any of its members' personal debts.
Utilising company property is meant to assist the business, not for personal gain. for the shareholders'
individual gain. Subsequently, a member is not entitled to any ownership stake in the company's assets,
either alone or collectively, during the business's existence or dissolution.
In addition, the company's members have the same legal access to engage into contracts with the business
as any other person. The Income Tax Act also recognises the firm as a separate legal entity. When a
business distributes its profits to its shareholders as a dividend and the shareholders are obliged to pay
income tax on the payout, the shareholders are also subject to income tax. This demonstrates the
distinction between a business and its stockholders.
In the well-known Salomon v. Salomon & Co. Ltd. case, the concept of a distinct legal entity was
clarified and shown.In this scenario, the following facts are true:
An extremely successful shoe company was owned by Mr. Saloman, who sold it to Saloman and Co. Ltd.
for $39,000. Saloman, his wife, their daughter, and their four sons made up the group. The corporation
sent Mr. Saloman $10,000 in debentures, 20,000 shares, and the remaining amount in cash as payment for
the acquisition consideration. On the company's assets, the debentures bore a floating charge. The other
six members of his family each contributed one share at a cost of one dollar. Saloman became one of this
company's directors together with his two sons. The managing director was Saloman. In a short while, the
business entered liquidation. The situation of circumstances at the time looked like this: Liabilities:
 MEANING, CHARACTERISTICS AND TYPES OFA COMPANY

$6000, assets: Saloman as debenture holder of $10,000 and $7,000 from unsecured creditors. As a result,
its assets were $11,000 less than its obligations. Because Saloman and the corporation were the same
person, the unsecured creditors asserted a precedence over the debenture holder.
However, the House of Lords ruled that a company's existence is completely separate and independent
from that of its members and that the company's assets must be used to pay down its debentures before
any other creditors, even unsecured ones, receive payment.
Without a doubt, Saloman's case proved that, even in situations when an individual owns all of the
business's shares, a registered company is legally considered to be an entity apart from its members. In
principle, there is no distinction between a business with two stockholders and one with two hundred
members. The company is a distinct legal entity in each scenario. The following situations also make use
of the rule established in Saloman's case: A.C. 12 Lee V. Lee's Airforming Ltd. (1961) Lee owned 2999
of the 3000 shares in Lee's Air Forming Ltd. In addition to becoming the company's chief pilot on a paid
basis, he elected himself managing director. When employed by the company, he perished in an aircraft
accident. As payment for her husband's work, his wife received remuneration. The widow was entitled to
compensation since the court determined that Lee was a distinct individual from the business he founded.
Lee was able to fulfil the roles of both master and servant simultaneously because of the corporate
personality rule.
In actuality, the idea of a company's distinct legal entity has been acknowledged far earlier than in
Saloman's instance. 1886 ILR 13 Cal 43 In Re Kondoi Tea Co Ltd. The Calcutta High Court found that a
company was an entity entirely distinct from its shareholders, acting as a separate person. According to
the ruling in Re. Sheffield etc. Society - 22 OBD 470), a corporation has the same legal status as a human
but lacks a physical presence.
Chief Justice Marshall of the United States highlighted a company's distinct corporate personality when
he described it as "a person, artificial, invisible, intangible and existing only in the eyes of the law." As a
mere creation of law, it only has the characteristics that are expressly granted to it by the charter of its
establishment or that come about by chance. [Darmouth College Trustees v. Woodward (1819) 17 US
518)
Everlasting Life:
One type of stable commercial organisation is a company. Its survival is not reliant on the passing away,
 MEANING, CHARACTERISTICS AND TYPES OFA COMPANY

becoming bankrupt, or retiring any one or more directors or shareholders. It can only be destroyed by
legislation, which also creates it. The company can endure forever, even though members come and go.
"A bomb during the war killed every member of a private corporation while they were in a general
meeting. However, the business persevered; a hydrogen bomb could not have destroyed it. You could
liken the corporation to a river that flows, yet whose identity never changes despite the constant changes
in the water. A firm is therefore eternal, even in the event that its membership changes.
The Common Seal:
As was previously said, a company cannot sign documents on its own behalf because it is an artificial
person and does not have a body like a normal person. It operates through real people known as its
directors. However, being a legal person, Only documents bearing its signature will be able to bind it.
Consequently, in lieu of the firm's signature, the law permits the use of a common seal bearing the name
of the company engraved on it. Any document containing the firm's common seal will be enforceable
against the company. A company's Articles of Association may provide specific guidelines about how to
apply the common seal to a document. The provisions of Table-A, the model set of articles annexed to the
Companies Act, shall apply in the event that the Articles are silent. Regulation 84 of Table-A states that
the company's seal may only be attached to an instrument with permission from the Board or a Committee
of the Board that has been given authorization to do so. Additionally, the seal may only be applied to an
instrument in the presence of the secretary, at least two directors, and any other person the Board may
designate for the purpose. The aforementioned individuals and the directors must sign any document on
which the company's seal is applied.
Limited Liability:
A company may be a business limited by guarantees or by shares. Members' liability in a business limited
by shares is capped at the unpaid share value. For instance, if a member has already paid Rs. 7 for each
share of a company with a face value of Rs. 10, he may be required to pay an additional Rs. 3 for each
share throughout the duration of the company. Members of a company limited by guarantee are only
liable to the extent that they agree to contribute to the firm's assets in the event that the business is wound
up.
Allocateable Units:
Shares in a publicly traded corporation are freely transferable. Since the ability to transfer shares is a
 MEANING, CHARACTERISTICS AND TYPES OFA COMPANY

statutory right, no provision can restrict it. in the pieces. The articles may, however, include legitimate
and reasonable limitations on members' ability to transfer their shares, as well as instructions on how such
transfers would be accomplished. However, total limitations on members' ability to transfer their shares
will be considered ultra vires. The articles of a private company, on the other hand, will limit a member's
ability to transfer their interests in businesses that have a legislative definition. If the firm refuses to
register a transfer of shares, the shareholder may apply to the Central Government in order to increase the
effectiveness of their right to transfer shares.
Separate Property:
A company can possess, use, and dispose of property under its own name since it is a separate legal
entity from its members. Its shareholders contribute funds and assets, but they do not own the property of
the company either individually or jointly. All of the company's property is vested in it, and it is the true
entity that controls, manages, and disposes of it.
Delegated Management:
An independent, self-governing, and self-regulating firm is a joint stock company. Not every member can
participate in the management of the company's business due to its vast membership. Therefore, the
directors—the chosen representatives of the shareholders—are given actual control and management.
They oversee the daily operations of the business. Furthermore, the company's management is democratic
since the company's general policy is decided by a majority of votes cast by shareholders. Unity of action
is enforced through centralized administration and majority decision-makin Delegated Management: An
independent, self-governing, and self-regulating firm is a joint stock company. Not every member can
participate in the management of the company's business due to its vast membership. Therefore, the
directors—the chosen representatives of the shareholders—are given actual control and management.
They oversee the daily operations of the business. Furthermore, the company's management is democratic
since the company's general policy is decided by a majority of votes cast by shareholders. Unity of action
is enforced through centralised administration and majority decision-making.
MEANING, CHARACTERISTICS AND TYPES OFA COMPANY
 MEANING, CHARACTERISTICS AND TYPES OFA COMPANY

TYPES OF COMPANIES

1. the comapnies as per the Incorporation Mode

Depending on the incorporation procedure, there are three different kinds of companies. Which are as
follows.
Listed companies:
A monarch incorporates these through a particular charter. The East India Company and the Bank of
England are two examples of businesses that were granted an English charter. The charter that
accompanies a chartered corporation delineates its powers and mode of operation. A company having a
charter has a lot of authority. It can handle its assets and enter into agreements with the same legal
authority as any other individual. The Sovereign retains the right to revoke the charter and close the
corporation down if the enterprise deviates from its stated operations.
Companies with Statutory Authority:
The legislatures of the Central or State governments pass Special Acts that permit the incorporation of
these companies. The State Bank of India, Unit Trust of India, Reserve Bank of India, Industrial Finance
Corporation, State Trading Corporation, and Life Insurance Corporation are statutory corporations.
These companies don't have a memorandum or articles of association. They have some powers afforded
to corporations incorporated under the corporations Act, and their authority derives from the Acts that
established them. The authority of these companies may alter as a result of legislative changes.
Companies that are incorporated or registered:
These were established either in accordance with the Companies Act of 1956 or an earlier version of the
Companies Act. Only after registering under the Act and receiving a certificate of incorporation from the
Registrar of firms do such firms become legally recognised. This is the method of company
incorporation that is most commonly used. The following three categories can be applied to registered
companies further.

Companies limited by shares:

These companies have a share capital, and each member's or the company's liability is capped by the
memorandum at the face value of the shares he has subscribed for. Put another way, a member may be
asked to settle any outstanding balances on shares he subscribed for at any time during the company's
existence or during its winding up. A business like this is known as a company limited by shares. A
firm that is restricted by shares could be either private or public. These are the most common categories
of businesses.

Companies Limited by Guarantee:

 MEANING, CHARACTERISTICS AND TYPES OFA COMPANY

These companies may or may not be capitalised with shares. In the case of the company's liquidation,
each member agrees to pay a predetermined amount of money as detailed in the Memorandum to cover
the company's obligations and liabilities [Sec 13(3)]. This sum that he has pledged is referred to as
"Guarantee." The number of members that the company must be registered with is specified in its articles
of association [Sec. 27 (2)]. This type of business is known as a corporation limited by guarantee. These
businesses rely on membership and entry fees to stay in business. They might or might not own equity.

Unlimited Companies:
Promoter choice about limited liability company formation is granted by Section 12. A "unlimited
company" is one that has no restrictions on its members' liability [Sec. 12(c)]. Share capital may or may
not be present in an unlimited corporation. It could be either a public or private firm if it has share
capital. If the business has equity, the article must specify how much equity the business must have in
order to be registered [Sec. 27 (1)].The number of members that the firm must register with must be
specified in the articles of incorporation.

II. Companies On the Basis of Number of Members

On the basis of number of members, a company are of two type

(1) Private Company, and (2) Public Company.

 MEANING, CHARACTERISTICS AND TYPES OFA COMPANY

A. Private Company

According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company is that
company which by its articles of association :

i) limits the number of its members to fifty, excluding employees who are

members or ex-employees who were and continue to be members;

ii) restricts the right of transfer of shares, if any;

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

debentures of the company.

Where two or more persons hold share jointly, they are treated as a single member.

According to Sec 12 of the Companies Act, the minimum number of members to form a

private company is two. A private company must use the word “Pvt” after its name.

B. Public company
According to Section 3 (1) (iv) of Indian Companies Act. 1956 A public company which is not a
Private Company If we explain the definition of Indian Companies Act. 1956 in regard to the
public company, we note the following :
i) The articles do not restrict the transfer of shares of the company
ii) It imposes no restriction no restriction on the maximum number of the members on
the company.
iii) It invites the general public to purchase the shares and debentures of the companies
(Differences between a Public Company and a Private company)

1. Minimum number : The minimum number of persons required to form a public company
is 7. It is 2 in case of a private company.
2. Maximum number : There is no restriction on maximum number of members in a public
company, whereas the maximum number cannot exceed 50 in a private company.
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III. On the basis of Control

On the basis of control, a company may be classified into :

1. Holding companies, and

2. Subsidiary Company
Holding Company [Sec. 4(4)]. A company is known as the holding company of another
company if it has control over the other company. According to Sec 4(4) a company is deemed
to be the holding company of another if, but only if that other is its subsidiary.
A company may become a holding company of another company in either of the
following three ways :-
a) by holding more than fifty per cent of the normal value of issued equity capital of
the company; or
b) By holding more than fifty per cent of its voting rights; or
c) by securing to itself the right to appoint, the majority of the directors of the other
company , directly or indirectly.
The other company in such a case is known as a “Subsidiary company”. Though the two companies
remain separate legal entities, yet the affairs of both the companies are managed and controlled by the
holding company. A holding company may have any number of subsidiaries. The annual accounts of the
holding company are required to disclose full information about the subsidiaries.
Subsidiary Company. [Sec. 4 (I)]. A company is know as a subsidiary of another company when
its control is exercised by the latter (called holding company) over the
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former called a subsidiary company. Where a company (company S) is subsidiary of another

company (say Company H), the former (Company S) becomes the subsidiary of the controlling
company (company H).
IV. On the basis of Ownership of companies
Government Companies. A Company of which not less than 51% of the paid up capital is held by
the Central Government of by State Government or Government singly or jointly is known as a
Government Company. It includes a company subsidiary to a government company. The share
capital of a government company may be wholly or partly owned by the government, but it
would not make it the agent of the government . The auditors of the government company are
appointed by the government on the advice of the Comptroller and Auditor General of India. The
Annual Report along with the auditor’s report are placed before both the House of the parliament.
Some of the examples of government companies are - Mahanagar Telephone Corporation Ltd.,
National Thermal Power Corporation Ltd., State Trading Corporation Ltd. Hydroelectric Power
Corporation Ltd. Bharat Heavy Electricals Ltd. Hindustan Machine Tools Ltd. etc.
Non-Government Companies. All other companies, except the Government Companies, are called
non-government companies. They do not satisfy the characteristics of a government company as given
above.
V. On the basis of Nationality of the Company
a) Indian Companies : These companies are registered in India under the
Companies Act. 1956 and have their registered office in India. Nationality of the members
in their case is immaterial.
b) Foreign Companies : It means any company incorporated outside India which has an
established place of business in India [Sec. 591 (I)]. A company has an
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established place of business in India if it has a specified place at which it carries on

business such as an office, store house or other premises with some visible indication premises.
Section 592 to 602 of Companies Act, 1956 contain provisions applicable to foreign
companies functioning in India.
MEANING, CHARACTERISTICS AND TYPES OFA COMPANY