The idea of a business ‘company’ or ‘corporation’ is not new; it was explored in the 4th century BC during the ‘Arthashastra’ phase. Its form evolved over time to meet the demands of changing market dynamics. The company style of business has a number of distinct benefits over other business structures such as sole proprietorships, partnerships, and so on. Limited Liability, Perpetual Succession, and other features are included.
Meaning of Company:
The term “business” comes from the Latin word “com” (which means “with” or “together,” and “panis” means “food,”) and it originally referred to a group of people who ate their meals together. Merchants used to take advantage of holiday events to discuss business affairs in the leisurely past.
Company issues have been more complex in recent years, and they cannot be addressed at social events. As a result, the group structure has become increasingly important. It refers to a joint-stock company in which many parties invest money. In common parlance, a corporation refers to a group of like-minded people who have come together to take out a business or undertaking.
It’s called an entity corporate and the people who make it up are incorporated into one body and given legal personality by the law. The name ‘corporation’ comes from the Latin word ‘corpus,’ which means ‘body.’ As a result, a legal entity produced by a means other than natural life is referred to as a “corporation.” As a result, it’s often referred to as an artificial legal entity. A company, as a legal entity, can have all of the same rights as a natural citizen and can be held liable for many of the same things.
An incorporated corporation owes its life either to a peculiar statute of the Parliament or to company law. Public organisations such as the Life Insurance Corporation of India, SBI, etc., have been introduced through special acts of Parliament, whereas companies such as Tata Steel Ltd., Reliance Industries Limited have been established under Company Law, i.e. the Companies Act, 1956, which is being replaced by the Companies Act, 2013.
Definition of Company:
The corporation is a natural as well as artificial human partnership in the legal sense (and is incorporated under the existing law of a country). As far as Companies Act 2013 is concerned, “company” means a corporation organised under this Act or in accordance with any former statute of the corporation [Section 2(20)].
An organisation is not only a legal entity. Rather, it is a legislative instrument for the achievement of social and economic goal. It is also a joint political, educational, economic and legal entity. As a result, the word corporation has been defined in several respects. “It is a way of co-operation and coordination in the actions of an enterprise.”
Members are those who contributed to it, created it, or to whom it belongs. Each member’s “share” is the proportion of capital to which he is entitled. While the right to move the shares can be restricted, they are still transferable.”
Nature and Characteristics of a Company:
Since a corporate entity (i.e., a company) is a legal construct, it is an abstract juridical being (i.e. one established by law); it is clothed with certain privileges, responsibilities, powers, and duties specified by law; and it is referred to as an “individual.”
Since it is a legal entity, it has only the powers granted to it by its Memorandum of Association, which serves as the company’s charter. It will perform all actions that a normal individual can perform within the scope of the charter’s powers.
- Corporate personality
A corporation formed under the Act is given a corporate identity, which means it has its own name, operates under its own name, has its own seal, and its assets are separate and distinct from those of its members. It is a distinct ‘person’ from the individuals who make it up. As a result, it can own property, incur debts, borrow money, open a bank account, hire employees, enter into contracts, and sue or be sued in the same way that a person can.
Its members are its shareholders, but they may also be its creditors at the same time. Even if he owns almost all of the company’s stock, a shareholder cannot be held accountable for the company’s actions.
A corporation is a legal person formed by statute. It is not a human being, but it behaves as though it were. It is regarded as a legal entity capable of entering into contracts, owning property in its own name, suing and being sued by others, and so on. Since it is invisible, intangible, and only exists in the contemplation of law, it is referred to as an artificial person. It has the ability to have rights and be bound by obligations.
- Limited Liability
One of the main benefits of doing business under the corporate system of organisation is the right of limited liability for business debts. The company, as a separate entity, owns its assets and is responsible for its liabilities.
A shareholder’s responsibility is limited to his or her contribution to the company’s capital up to the nominal value of the stock owned but not paid. Even as a group, members are not the owners of the company’s assets or responsible for its debts. The theory of limited liability is subject to a number of exceptions.
- Perpetual Succession
An incorporated corporation never dies, until it is legally wound up. Since an organisation is a separate legal body, it is unaffected by the death or resignation of any of its members, and it continues to exist despite the complete shift of membership. The terms of a company’s Memorandum of Association decide its lifespan.
It may exist indefinitely or for a set period of time to carry out a mission or achieve an objective outlined in the Memorandum of Association. As a result, perpetual succession means that a company’s membership can change from time to time without affecting its continuity.
The membership of an incorporated company will change if one shareholder sells or transfers his shares to another, or if his shares pass to his legal representatives upon his death, or if he ceases to be a member under the Companies Act in another way.
As a result, permanent succession refers to a corporation’s capacity to sustain its life by the recruitment of new employees to replace those who leave the company.
- Separate property
A corporation is a legal entity separate from its shareholders that is capable of buying, possessing, and disposing of land under its own right. The corporation is the legal entity in which all of the company’s assets are vested and by which it is owned, regulated, and disposed of.
- Transferability of shares
A company’s stock is split into bits, known as shares. The shares are defined as movable property that can be freely transferred under certain circumstances, implying that no shareholder is indefinitely or obligated to a corporation. When joint-stock corporations were formed, the aim was for their shares to be freely transferable. [Re. Balia and San Francisco Rly., (1968) L.R. 3 Q.B. 588]
The theory is enunciated in Section 44 of the Companies Act, 2013, which states that the securities owned by members are movable property that can be passed from one individual to another in the manner given by the papers.
If the articles do not include any provisions for the transfer of shares, and the Regulations in Table “F” of Schedule I to the Companies Act, 2013, are not specifically omitted, the transfer of shares may be regulated by the general law governing the transfer of movable goods.
Furthermore, instead of physical transactions, most listed corporations’ shares are now transferable via electronic mode, i.e., via Depository Participants in dematerialized form.
There are, however, limitations on the transferability of shares of a Private Limited Company, which are discussed in Chapter 2.
- Common seal
An organisation becomes a legal body with permanent succession and a common seal until it is incorporated. Since the organisation does not have a physical presence, it must operate by its agents, and any transactions entered into by its agents must bear the company’s seal. The Common Seal serves as a company’s official signature. The company’s name must be etched on the common seal.
An individual properly allowed to execute documents pursuant to a power of attorney granted in his favour under the company’s common seal, on the other hand, can do so without the common seal being affixed to the documents.
Since any deed, device, or record to which the seal is illegally or fraudulently affixed will engage the corporation in legal proceedings and lawsuits, the person allowed to use the seal should ensure that it is held under his personal custody and treated extremely carefully.
- Capacity to sue and to be sued
A corporation is a legal entity that can sue and be sued under its own name. Suing means to take civil action against others or to file a lawsuit before a court of law. Any disciplinary actions taken against the corporation must be done so under its name. Similarly, the corporation could file a lawsuit of its own name against someone.
A business’s right to sue is triggered when the company suffers an injury, such as to its property or its reputation. As a result, the corporation has the right to sue for libel or defamation damages, depending on the situation. [Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj)]
Where the workmen of a company demonstrating their fight against the management of a company were preparing video cassettes, it was held that it was not actionable until the contents of the cassettes were found to be defamatory. The court could not stop the cassette display. [TVS Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37]
- Contractual Rights
An organisation, as a legal body distinct from its owners, may enter into contracts under its own name for the conduct of business. As a corporation is not a trustee for its owners, a shareholder cannot execute a contract made by his company because he is neither a party to the contract nor entitled to the value gained from it.
A shareholder, likewise, cannot be sued for contracts made by his firm. The difference between a corporation and its members is not limited to privity laws but pervades all aspects of contract law. As a result, if a director fails to report a violation of his duties to his company, and as a result, a shareholder is compelled to enter into a deal on behalf of the company with the director that he would not have entered into if the breach had been disclosed, the shareholder cannot revoke the contract.
- Limitation of Action
A corporation’s authority is limited by the Memorandum of Association. The company’s Memorandum of Association establishes the company’s powers and objectives, as well as the foundation upon which the company’s entire organisation is built.
In certain cases, ample powers are given in the Memorandum of Association to allow it to carry out its acts without any constraints and limitations. However, after the powers have been established, it cannot go beyond them unless the Memorandum of Association is amended first.
- Separate Management
Like previously said, members can prosper without being burdened by the company’s administration. They may not have direct and meaningful oversight of its operations, but they elect their members to the company’s Board of Directors to perform administrative activities through their own management staff.
- Voluntary Association for Profit
A corporation is a profit-making charitable organisation. It is created to achieve such specified objectives, and any benefit earned is split among the company’s owners or retained for possible growth. Only a Section 8 corporation with no profit motive may be created.
- Termination of Existence
Since it is an artificial juridical person, a corporation does not die naturally. It is established by statute, conducts its business in accordance with law throughout its existence, and is eventually obliterated by law. In most cases, a company’s life is over by winding up. Companies can use techniques such as reorganization, restructuring, and amalgamation to avoid going bankrupt.
Difference between Company and Partnership
|A company has a distinct legal person.||A partnership is not a distinct legal person.|
|A company can have its separate property.||A partnership firm’s property is the property of the firm’s partners.|
|A company has a perpetual succession.||A partnership end when one of partner is insolvent or dead.|
|Registration of a company is necessary.||Registration of partnership firm is optional.|
|A company’s liability is limited and does not extend to its shareholders.||Liability of a partnership firm is unlimited.|
|A company has an option to get listed on a stock exchange.||A partnership firm does not have the option to get listed on stock exchange.|
|A member of a company can contract within itself.||A partner cannot contract with the firm.|
|Members of the company are not it’s agents.||Partners are the agents of the firm.|