COMPANY FORMATION: BASICS
December 4, 2019
Meaning of a Company
A company, abbreviated as co., is a legal entity made up of an association of people, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise. Company members share a common purpose, and unite to focus their various talents and organize their collectively available skills or resources to achieve specific, declared goals. A company at its crux is an artificial person created by law. It’s an association of individuals having a separate legal existence, perpetual succession and a common seal. Its capital is generally divided into transferable shares, subject to certain conditions.
However, Section 2(20) of the Companies Act, 2013, defines the term ‘Company’ as follows: “Company means a company incorporated under this Act or under any previous company law.”
Features of a Company
A Company is a Separate Legal Entity
One of the most distinctive features of a Company, as compared to other organizations, is that it acquires a unique character of being a separate legal entity. Hence, when you register a company, you give it a legal personality with similar rights and powers as a human being.
The existence of a company is distinct and separate from that of its members. It can own property, bank accounts, raise loans, incur liabilities and enter into contracts. According to Law, it is altogether different from the subscribers to the Memorandum of Association.
Also, it has a distinct personality which is different from those who compose it. Member can also contract with the Company and acquire a right against it or incur a liability to it. However, for any debts, the creditors can sue the Company but the members cannot.
A Company can own, enjoy, and dispose of a property in its own name. While the shareholders contribute to the capital and assets, the company is the rightful owner of such assets and capital. Further, the shareholders are not private or joint holders of the company’s property.
Another important feature of a Company is that it continues to carry on its business notwithstanding the death of change of its members until it is wound up on the grounds specified by the Act. Further, the shares of the company change hands infinitely, but that does not affect the existence of the company.
In simple words, the company is an artificial person which is brought into existence by the law. Hence, it can be ended by law alone and is unaffected by the death or insolvency of its members.
One of the important features of a company is the limited liability of its members. The liability of a member depends on the type of company.
- In the case of a limited liability company, the debts of the company in totality do not become the debts of its shareholders. In such a case, the liability of its members is limited to the extent of the nominal value of shares held by them. The shareholders cannot be asked to pay more than the unpaid value of their shares.
- In the case of a company limited by guarantee, members are liable only to the extent of the amount guaranteed by them. Further, this liability arises only when the company goes into liquidation.
- Finally, if it is an unlimited company, then the liability of its members is unlimited too. But such instances are very rare.
Artificial Legal Person
Another one of the features of a company is that it is known as an Artificial Legal Person.
- Artificial – because its creation is by a process other than natural birth.
- Legal – because its creation is by law, and
- Person – because it has similar rights to a human being.
Further, a company can own property, bank accounts, and do everything that a natural person can do except go to jail, marry, take an oath, or practice a learned profession. Hence, it is a legal person in its own sense.
Since a company is an artificial person, it needs humans to function. These humans are Directors who can authenticate the company’s formal acts either on their own or through the common seal of the company.
While a company is an artificial person and works through the agency of human beings, it has an official signature. This is affixed by the officers and employees of the company on all its documents. This official signature is the Common Seal.
However, the Companies (Amendment) Act, 2015 has made the Common Seal optional. Section 9 of the Act does not have the phrase ‘and a common seal’ in it. This provides an alternative mode of authorization for companies who do not wish to have a common seal.
According to this amendment, if a company does not have a common seal, then the authorization shall be done by:
- Two Directors or
- One Director and the Company Secretary (if the company has appointed a Company Secretary).
In this article, our main concerns are Private Limited Company and Public imited Company.
What is a Private Limited Company?
A private limited company is a business entity that is held by private owners. This type of entity limits the owner’s liability to their ownership stake, and restricts shareholders from publicly trading shares. A private company has the following features:
- Restricts the right of the shareholders to transfer their shares.
- Has a minimum of 2 and maximum of 50 members.
- does not invite public to subscribe to its share capital
- Must have a minimum paid up capital of Rs. 1 lakh or such a higher amount which may be prescribed from time to time.
Minimum Requirement of a Private Company:
- Minimum 2 Shareholders
- Minimum 2 Directors (The directors and shareholders can be same person)
- Minimum Authorised Share Capital shall be Rs. 100,000 (INR One Lac)
- DSC (Digital Signature Certificate) for all the Directors (for applying of DIN)
- DIN (Director Identification Number) for all the Directors
What is a Public Limited Company?
A public company is a company that has permission to issue registered securities to the general public through an initial public offering (IPO) and it is traded on at least one stock exchange market. A public company is not authorised to begin its business operations just upon the grant of the certificate of incorporation. In order to be eligible to run as a public company, it should obtain another document called a trading certificate. A public Ltd company has the following characteristics:
- It allows the shareholders to transfer their shares.
- Has a minimum of 7 members, and for maximum there is no limit.
- it invites the general public to subscribe to its shares
- Must have a minimum paid up capital of Rs 5 lakh or such a higher amount as may be prescribed from time to time.
Minimum Requirement of a Public Company:
- Minimum 7 Shareholders
- Minimum 3 Directors (The directors and shareholders can be same person)
- Minimum Authorised Share Capital shall be Rs. 500,000 (INR Five Lac)
- DIN (Director Identification Number) for all the Directors
- DSC (Digital Signature Certificate) for one of the Directors