Company Meaning, Definition, Features, Advantage and Limitations

Company is a legal entity formed by individuals or groups to conduct business, typically with the goal of making a profit. It is separate from its owners and operates under the laws governing corporations. Companies can take various forms, such as private or public limited companies, depending on ownership and shareholding structure. In India, companies are primarily governed by the Companies Act, 2013, which defines a company as an association of persons formed for a lawful purpose and registered under the Act. Companies have legal status, can own property, enter contracts, and can be sued or sue in their own name.

Features of Company:

Company is a distinct legal entity formed to conduct business and carry out economic activities. It has several key features that differentiate it from other types of business organizations.

1. Separate Legal Entity

One of the most fundamental features of a company is that it has a separate legal identity from its owners (shareholders). This means the company itself can own property, sue, and be sued in its own name. The shareholders are not personally liable for the company’s debts or obligations.

2. Limited Liability

The liability of the shareholders in a company is limited to the amount of capital they have invested or committed to the company. In the event of company insolvency, shareholders are not required to use their personal assets to pay the company’s debts, providing protection from significant personal loss.

3. Perpetual Succession

Company enjoys perpetual succession, meaning its existence is not affected by the death, insolvency, or withdrawal of any shareholder or director. The company continues to exist until it is formally dissolved or wound up according to legal procedures, ensuring continuity and stability.

4. Transferability of Shares

In most companies, particularly public limited companies, shares can be freely transferred from one shareholder to another without affecting the company’s operations or existence. This feature ensures liquidity for shareholders and facilitates easy entry and exit from the company’s ownership.

5. Common Seal (Optional)

Traditionally, companies had a common seal that was used as their official signature on documents. Though now optional in many jurisdictions, including India, the use of a common seal once symbolized the formal execution of contracts and agreements by the company.

6. Separation of Ownership and Management

A key feature of a company is the separation of ownership and management. Shareholders (owners) appoint a Board of Directors to manage the day-to-day affairs of the company. This separation allows professional managers to run the company, even if they do not own shares.

7. Artificial Legal Person

Company is considered an artificial legal person, meaning it has many of the rights and responsibilities of a natural person, such as owning property, entering contracts, and suing or being sued. However, it cannot act on its own and must act through its directors, officers, or authorized representatives.

8. Capacity to Sue and Be Sued

As a separate legal entity, a company can sue other parties and can be sued in its own name. This feature is essential for conducting business activities, as the company must have legal recourse in disputes, and it ensures that the company’s actions are independent of its shareholders.

9. Statutory Compliance

Company must adhere to various statutory and legal requirements. This includes filing annual returns, maintaining records, holding meetings (such as Annual General Meetings), and complying with tax regulations. These statutory obligations ensure transparency and accountability to regulators, shareholders, and the public.

10. Corporate Veil

The concept of the corporate veil protects shareholders from being personally liable for the company’s actions. This veil ensures that the company’s financial obligations do not extend to shareholders’ personal assets, barring exceptional circumstances such as fraud or wrongful conduct (when the veil may be lifted).

11. Capital Structure

Company raises capital by issuing shares to shareholders and may also borrow funds. Its capital is divided into shares of various classes (such as equity and preference shares), providing flexibility in raising funds. Shareholders receive dividends as a return on their investment, subject to company performance and Board approval.

12. Voluntary Association

Company is a voluntary association of individuals who come together to form an organization for a lawful purpose. Whether it’s a private or public company, the members voluntarily contribute capital and resources to the company and participate in its activities, usually with the aim of earning a return on their investment.

Advantages of a Company:

1. Limited Liability

One of the primary advantages of a company is the concept of limited liability. Shareholders are only liable for the amount of capital they have invested in the company, protecting their personal assets. In the event of insolvency or debts, creditors cannot claim personal assets of the shareholders beyond their shareholding.

2. Perpetual Succession

Company has perpetual succession, meaning it continues to exist irrespective of changes in ownership, such as the death, insolvency, or resignation of any member or director. This ensures the company’s stability and long-term survival, making it more attractive to investors and stakeholders.

3. Separate Legal Entity

Company is a separate legal entity from its shareholders and directors. This allows the company to own property, enter into contracts, and conduct business in its own name. It can sue or be sued independently, ensuring that the personal assets of shareholders remain protected.

4. Transferability of Shares

Shares of a company, particularly those in a public limited company, can be easily transferred between individuals. This offers liquidity to investors, allowing them to buy and sell shares freely. Share transferability encourages investment and makes it easier for companies to raise capital.

5. Access to Capital

Company can raise large amounts of capital by issuing shares to the public in a process known as an Initial Public Offering (IPO) or by issuing additional shares later. This gives the company a significant advantage in financing large-scale projects and expansions compared to other business structures like partnerships or sole proprietorships.

6. Professional Management

Companies, particularly large ones, often hire professional managers to run their day-to-day operations. This separation of ownership and management allows shareholders to benefit from the expertise and experience of specialized professionals, ensuring efficient operation and decision-making.

7. Corporate Credibility

Company typically has greater credibility in the market compared to other business structures. It can establish stronger relationships with creditors, suppliers, and investors due to the transparency and regulatory requirements it adheres to, such as financial reporting, audits, and governance rules.

Limitations of a Company:

1. Complex Formation Process

The process of incorporating a company is time-consuming and complex. It involves various legal formalities such as registering with the Registrar of Companies, drafting legal documents like Memorandum and Articles of Association, and obtaining necessary permits. This makes it difficult for small businesses to form companies easily.

2. Strict Legal Compliance

Once formed, a company is subject to a host of statutory regulations and compliances. Companies are required to file annual returns, hold regular meetings (such as Annual General Meetings), maintain proper accounting records, and follow corporate governance practices. Non-compliance can lead to heavy penalties or legal action.

3. Lack of Privacy

As a company, certain financial information must be made public, such as the filing of annual reports, financial statements, and shareholder details. This lack of privacy can be a disadvantage for business owners who prefer to keep their business affairs confidential, especially in competitive industries.

4. High Costs

The cost of setting up and maintaining a company is often higher than other business structures. This includes registration fees, legal fees, auditing costs, and ongoing compliance-related expenses. These overheads can be a burden, especially for smaller companies or startups.

5. Separation of Ownership and Control

Although professional management is an advantage, it can also lead to a conflict of interest between owners (shareholders) and managers. Managers may not always act in the best interest of shareholders, resulting in agency problems, where decisions might favor personal gain over company profitability or shareholder value.

6. Double Taxation

In the case of C-Corporations, companies are subject to double taxation. First, the company’s profits are taxed at the corporate level. Then, when dividends are distributed to shareholders, the income is taxed again at the individual level. This can be a financial disadvantage compared to other forms of business.

7. Winding-Up Difficulties

Winding up or dissolving a company is a complicated legal process that requires the fulfillment of several formalities, including paying off creditors, distributing remaining assets, and formally liquidating the business. The winding-up process can be lengthy and costly, making it difficult for owners to exit easily.