Meaning and Nature of Company

11/03/2020 0 By indiafreenotes

A company is a third legal business structure and has entirely a different organizational structure from the sole proprietorship or partnership. Its formation is due to firstly, the sole proprietorship and partnership cannot meet the increased capital demand of industry and commerce. Secondly, the company ensures the protection of limited liability to the shareholders and investors.

According to Prof. L.H. Haney, “Company is an artificial person created by law having separated entity with a perpetual succession and common seal”. According to Justice Lindley a company means association of persons who contribute in shape of money or money’s worth to a common stock and employ it for some specific purpose.

There are three main activities of a business

  1. Merchandising activities. This involve activities deal with goods in a ready to sell condition.
  2. Manufacturing Activities. This involve from purchase to raw material and put labor and factory overhead on the raw material and produce a product.
  3. Services Activities. This involve banking, education, insurance and training activities.

Characteristics of a Company

The company has several distinct characteristics; the significant ones are discussed here:

Separate Legal Entity

A company is a separate legal entity from its members who constitute it. It can hold, purchase and sell properties and enter into contracts in its own name. It is an artificial legal person who can sue aid be sued. Companies are owned by shareholders and they elect the Board of Directors, who run the company. The board in turn selects the management. Thus the shareholders exercise only indirect control over the affairs of the company. The separation of ownership from the management some-times results in a conflict of interests between owners and management. The best the shareholders can do is to change some of the directors through vote in the annual general meeting subsequent to any such conflict.

Limited Liability

The liability of the shareholders of a company is limited to the nominal value of the shares held by them. In the event of liquidation, the maximum loss of a shareholder is equal to the nominal value of the shares held by him. The creditors have no claim on the personal assets of the shareholders in the event of liquidation.

Transferability of Shares

The shares of a joint stock company are freely transferable. It does not require any permission from the company or consent of other shareholders. The shares of listed companies can be sold or purchased on the stock exchange and ownership transferred without any difficulty. However, in case of a private limited company, the transfer of shares is subject to the restrictions given in the company’s articles.

Ability to Acquire a Broad Capital Base

Following are significant factors that enable a company to raise large amount of capital

  1. The nominal value of shares is kept small, as a result of which investment of any size is possible.
  2. Limited liability minimize the risk of the investors and makes investment attractive and safer.

An Artificial Person created by Law

A company is called an artificial person because it does not take birth like a natural person but it comes into existence through the law. The company possess only those properties which are conferred upon it by its Memorandum of Association (Charter).

Continuous Existence

The companies generally have a continuous existence irrespective of changes in ownership. In the cases of sole proprietorship and partnership, change in ownership means the dissolution of the original business and formation of a new business.

Common Seal

Being an artificial person, a company can act through natural persons only. The acts of a company are authorized by the “common seal”. The “common seal” is the official signature of the company. A document not bearing the common seal is not binding on the company.