Company Meaning, Definition, Features, Advantage and Limitations

9th July 2020 1 By indiafreenotes

A company is an artificial person being created by the law that has an existence separate and apart from its owners. In other words, a company is an artificial person created by law, with a distinctive name, a common seal and perpetual succession of members. It can sue and be sued in its own name. Let us consider a few definitions of company.

The Indian Companies Act, 1956 defines a joint stock company as “a company limited by shares having a permanent paid up or nominal share capital of fixed amount divided into shares also of fixed amount, held and transferable as stock and formed on the principles of having in its members only the holders of those shares or stocks and no other persons.”

One most widely quoted definition of a company (called corporation in USA) is given by Chief Justice Marshal in these words: “A corporation is an artificial being invisible, intangible and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or an incidental to its very existence”.

Lord Justice Lindley has defined a company as “an association of many persons, who contribute money or money’s worth to a common stock and employ it for a common purpose. 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”. In brief, a company can be defined as an artificial (legal) person with its independent legal entity.

Definition of Company

The Indian Companies Act, 1956 defines a company as follows:

“A company is a company registered under this Act, or under any of the previous company laws.”

One most significant feature of a company which could be inferred from this legal definition is that a company must always be registered i.e. without registration under law, no company could be formed. In fact, law alone can create a company.

We can define a company as follows:

Company is an artificial person created by law, having an entity absolutely distinct from the entity of its owners (i.e members); and characterised by features of perpetual succession, common seal and limited liability.

Features of Company

Based on the above definitions, given below are the main features of company form of ownership:

  1. Artificial Legal Person

A company is an artificial person created by law. Though it has no body, no conscience, still it exists as a person. Like a person, it can enter into contracts in its own name and likewise may sue and be sued in its own name.

  1. Separate Legal Entity

A company has a distinct entity separate from its members or shareholders. Therefore, a shareholder of the company can enter into contract with the company. He/she can sue the company and be sued by company.

  1. Common Seal

Being an artificial person, company cannot sign the documents. Hence, it uses a common seal on which its name is engraved. Putting the common seal on papers relating to company’s transactions makes them binding on the company.

  1. Perpetual Existence

Unlike partnership, the existence of a company is not affected by the death, lunacy, insolvency or retirement of its members or directors. This is because the company enjoys a separate legal existence from that of its members. It is said, “Members may come, members may go but the company goes for ever”. It is created by law and is dissolved by law itself.

  1. Limited Liability

The liability of the members of a company is normally limited to the amount of shares held or guarantee given by them.

  1. Transferability of Shares

The member of a public limited company can sell his shares to others without the consent of other shareholders. Yes, he has to follow the procedure laid down in the Companies Act for transferring his shares. However, there are restrictions for transferring shares to others in case of a private limited company.

  1. Separation of Ownership from Management

The shareholders, i.e., owners being scattered all over country give right the directors to manage the affairs of the company. The directors are the representatives of the shareholders. Thus, ownership is separated from management.

  1. Number of Members

In case of a public limited company, the minimum number is seven and there is no maximum limit. But, for a private limited company, the minimum number of members is two and the maximum number is fifty.

Advantages of a Company

Following are the major advantages of the company form of business organization:

(i) Huge Financial Resources

A company is able to accumulate huge finances from the public; and undertake projects beyond the contemplation of any other form of business organization. Because of huge financial resources, the company is able to implement schemes for growth and expansion of the company.

(ii) Limited Liability

Members of a company enjoy the advantage of limited liability. The fact of limited liability induces public to invest in companies. This advantage of limited liability is the exclusive advantage available only with the corporate form of business organization.

(iii) Permanent Life

Company is the most stable form of business organisation; as companies enjoy perpetual succession or permanent life. This advantage of perpetual succession is socially desirable too. Permanent business in the corporate form provides a perennial flow of goods and services to the community and generates numerous employment opportunities.

(iv) Democratic Management

Company management is democratic in nature. Company is managed by a Board of Directors; directors being elected representatives of owners i.e. members of the company.

(v) Efficient Management

To conduct its operations, a company requires professionally expert managers, in various areas of its functioning. A company can afford these experts, because of its huge financial resources. These experts lead the operational life of the company along most profitable and efficient lines.

Moreover, professional managers, because of their educational background and modem outlook pay due attention to discharging social responsibilities by the company.

(vi) Transferability of Shares

Shares in a company are freely transferable. As such, many persons feel like investing in companies; because they can liquidate their investment, as per their choice. Because of the transferability of shares, more profitable companies can attract capital from less profitable ones.

(vii) Economies of Large Scale

Companies undertake production and marketing activities on a large scale. As such, they can reap full advantages of large scale operation; a part of which advantage may be passed on to consumers, in the form of cheaper products and services.

(viii) Capital Formation

The company form of business organisation is responsible for capital formation in the economy. Savings by people are encouraged by companies; because of a desire of people to buy shares of companies. Investment by people in the shares/debentures of companies enables companies to undertake big business projects – directly contributing to capital formation in the economy.

(ix) Public Confidence

Companies enjoy public trust and confidence because of regulation of companies by the Companies Act. Disclosure of profit and financial position by companies, through publication of Final Accounts further helps to build public confidence in companies. It is this trust and confidence which induces people to invest in companies, leading to business prosperity-vital for the economy.

(x) Goodwill for Self and the Nation

Big companies enjoy huge goodwill-nationally and internationally. Favourable image of big companies increases the goodwill of the nation too in the international commercial market.

Limitations of a Company

Following are the major limitations of the company form of business organisation:

(i) Legal Formalities

Numerous legal and procedural formalities have to be complied with for the formation of company. This discourages many enterprising people to think of starting a company.

(ii) Excessive Governmental Control

Companies are subject to excessive Governmental control through various provisions of the Companies Act. This reduces flexibility of operations in a company; which is most necessary to fully exploit business opportunities for gains.

(iii) Lack of Motivation

Companies are managed by hired professional managers, who often lack motivation to work. In fact, they do not have as much motivation to work as owners would have, in case they (i.e. owners) were allowed to manage the company, on their own.

(iv) Oligarchic Management

Company management is democratic only in theory. In practice, it represents the worst type of oligarchic management (i.e. management by a few). Due to a large number of members and their indifferent attitude, a small group of members operates the affairs of the company-more to its own advantage and neglecting the good of the large body of members.

(v) Growth of Monopolistic Tendencies

Companies, because of their large size, lead to growth of monopolistic tendencies. The larger, in fact, is the size of a company; the more is the possibility of it assuming monopolistic power. Because of their monopolistic position, companies may never hesitate in resorting to consumer exploitation, through charging very high prices for their products and services.

(vi) Delays in Decision-Making

Red tape, bureaucracy and excessive provisions of the Companies Act, because delayed decision-making in a company. The company, as such, practically loses all flexibility of operations; and is unable to take full advantage of momentary opportunities for gain.

(vii) Corrupt Management

Now-a-clays, in most of the companies, managements are highly corrupt. They misuse their position and manipulate the working of the company to their own petty self-interests. In this way, innocent public are cheated and deprived of due advantage of their hard-earned money invested in the company.

(viii) Lack of Secrecy

There is lack of secrecy in corporate affairs. Public can inspect important documents of the company by paying the prescribed fee. Annual Accounts of the company have to be published. This lack of secrecy does not allow companies to take full advantage of their trade secrets.

(ix) Political Corruption

Because of their huge financial resources, companies field their own candidates to seek elections to the Parliament or State legislatures or other decision-making bodies. Having won elections, these candidates make available undue advantages to the ‘big-bosses’ of the company. Thus companies are largely responsible for corrupting the political system of the country.