Company- Definition, Characteristics and Types

The word ‘Company’ is thought to be derived from the Latin words ‘com’ (meaning- with or together) and ‘panis’ (meaning – bread). Thus, a company is usually defined as an association or a group of like-minded people formed for the sole purpose of carrying on some business. The businesses can range from selling commercial products/services to industries built solely for processing raw materials for further use in the market.

Now, let's delve into this topic a little further and understand more about what it means to be a company and also, what types of companies are there in the current market?

All in brief :)

Company buildings in a business district

Definition under Companies Act, 2013:

Section 2 (20) simply defines a company as - “Company means a company incorporated under the Companies Act, 2013 or under any previous law”.

The phrase “previous law” is defined under Section 2 (67) to mean- “Acts relating to companies in force before:

  1. The Indian Companies Act, 1866 ;

  2. The Indian Companies Act, 1866 ;

  3. The Indian Companies Act, 1882;

  4. The Indian Companies Act, 1913 ;

  5. The Registration of Transferred Companies Ordinance, 1942 ;

  6. The Companies Act, 1956; and

  7. Any law corresponding to any of the aforesaid Acts or the Ordinances and in force”

Features of a company:

1. Artificial Person:

In the eyes of the law, a company is treated as a legal person and is classed under juridical persons. This means that a company enjoys many legal rights that an actual person holds in India. A company can:

  • Own or sell property under its own name,

  • Sue or be sued on its name and

  • Form partnerships with other companies.

Companies also have distinct names and have bank accounts to their name. Since it can act and do almost everything an actual legal person can do, it is called an artificial person.

2. Separate Legal Entity:

In the eyes of the law, a company is an independent legal entity from the people who control its operations i.e. the management. In case a member defaults on his payments, the company won’t be responsible for such default. The assets and liabilities of a company do not pass on to its members in most situations except in cases where the “corporate veil” is taken off.

This principle was further elaborated in Salomon v. Salomon (1987) where it was held that a company has a separate personality that is distinct from its members or subscribers even if a single shareholder is holding all of its share capital.

3. Limited Liability:

The liability of the members of the company is limited and is based on the quantum of contribution to the assets of the company i.e. the actual value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him when called upon to pay and nothing more, even if liabilities of the company far exceeds its assets.

In the case of a company limited by guarantee, the members (Guarantor) may have to cover some of the losses incurred by the company by using their own assets.

This principle is all about reducing one’s personal exposure to financial risk due to elements unrelated to him. That is why limited liability is classed as one of the crucial elements of a corporate form of organization of a business.

4. Perpetual succession:

The existence of a company is perpetual in nature i.e. it never ceases to exist. Any change in membership or fulfillment of objectives does not necessarily lead to the end of a company. Death, insolvency, bankruptcy, or insanity of members also does not affect the existence of a company.

In PNB v. Lakshmi Industrial & Trading Co. Ltd, the Allahabad High Court held that perpetual succession means that membership of a company may keep on changing from time to time, but that does not affect the company’s continuity.

5. Transferability of shares:

Section 44 of the Act provides that “the shares or debentures or any other interest of any member in a company shall be a movable property that can be transferred in the manner provided in the article of the company.”

What this means is that upon the incorporation of a company, its members can sell their shares in an open market and get a return on their investment without any hassle of withdrawing money from the company. This provides liquidity and stability for the investor (retail or institutional). Partnership firms miss out on this essential advantage as they do not fall under the ambit of the Companies Act, 2013.

6. Common Seal:

The recognition to a separate seal was given in the case Tata Engineering & Locomotive Co. Ltd. v. the State of Bihar. A common seal is the official signature of the company and marks its symbol of incorporation. However, as per the Companies (Amendment) Act, 2015, a company may or may not have a common seal.

Common seal

Section 22 provides that a company, under its common seal, can authorize any person in respect of any specified matter, to act as an attorney to execute other deeds on behalf of the company, such deeds can be in or outside India. Usually, such a deed is passed only when signed with a common seal. However, after the 2015 amendment, if a company does not have a common seal, the assent to such deed may be given by the Company Secretary (CS) or by its Director(s).