What Is A Company? Meaning, Features, & Types Of Companies
A company has different definitions based on the country it is situated in.
In the UK:
A company is a body corporate or an incorporated business organization registered under the companies act. It can be a limited or an unlimited company, private or a public company, company limited by guarantee or a company having a share capital, or a community interest company.
According to the law in the USA:
A company can be a “corporation, partnership, association, joint-stock company, trust, fund, or organized group of persons, whether incorporated or not, and (in an official capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent, for any of the foregoing”
The Companies Act 2013 of India defines a company as-
A registered association which is an artificial legal person, having an independent legal, entity with a perpetual succession, a common seal for its signatures, a common capital comprised of transferable shares and carrying limited liability.
A more precise, global and modern definition of a company could be:
A business entity which acts as an artificial legal person, formed by a legal person or a group of legal persons to engage in or carry on a business or industrial enterprise.
Few points that should be noted in this definition:
Legal Person: A legal person could be human or a non-human entity which is recognised by law as having legal rights and is subject to obligations.
A person or a group of persons: It is no more required to be an association of persons to form a company. A company can also be started as a single person company (one-person company).
Since the definition, features, characteristics, and types of companies differ in different countries (especially in the United States), all the following sections will be focused on an Indian and UK perspective of a company. Visit this article for the US perspective of the types of companies.
Features & Characteristics Of A Company
Incorporated association: A company comes into existence when it is registered under the Companies Act (or other equivalent act under the law). A company has to fulfil requirements in terms of documents (MOA, AOA), shareholders, directors, and share capital to be deemed as a legal association.
Artificial Legal Person: In the eyes of the law, A company is an artificial legal person which has the rights to acquire or dispose of any property, to enter into contracts in its own name, and to sue and be sued by others.
Separate Legal Entity: A company has a distinct entity and is independent of its members or people controlling it. A separate legal entity means that only the company is responsible to repay creditors and to get sued for its deeds. The individual members cannot be sued for actions performed by the company. Similarly, the company is not liable to pay personal debts of the members.
Perpetual Existence: Unlike other non-registered business entities, a company is a stable business organisation. Its life doesn’t depend on the life of its shareholders, directors, or employees. Members may come and go but the company goes on forever.
Common Seal: A company being an artificial legal person, uses its common seal (with the name of the company engraved on it) as a substitute for its signature. Any document bearing the common seal of the company will be legally binding on the company.
Limited Liability: A company may be limited by guarantee or limited by shares. In a company limited by shares, the liability of the shareholders is limited to the unpaid value of their shares. In a company limited by guarantee, the liability of the members is limited to the amount they had agreed upon to contribute to the assets of the company in the event of it being wound up.
Types of companies
A company can be classified into various types depending upon the following requirements:
Classification of Companies by Mode of Incorporation
Royal Chartered Companies
These companies are formed under a special charter by the monarch or by a special order of a king or a queen. Few examples of royal chartered companies are BBC, East India Company, Bank Of England, etc.
These companies are incorporated by a special act passed by the central or state legislature. These companies are intended to carry out some business of national importance. For example, The Reserve Bank of India was formed under RBI act 1934.
Registered or Incorporated Companies
These companies are formed/incorporated under the companies act passed by the government. These companies come into existence only after these are registered under the act and the certificate of incorporation is passed by the Registrar of companies.
Classification of Companies based on the liability of the members
The registered companies can be classified into the following categories based on the liabilities of members:
Companies Limited By Shares
These companies have a defined share capital and the liability of each member is limited by the memorandum to the extent of the face value of shares subscribed by him.
Companies Limited By Guarantee
These companies may or may not have a share capital and the liability of each member is limited by the memorandum to the extent of the sum of money s/he had promised to pay in the event of liquidation of the company for payments of debts and liabilities of the company.
There is no formal restriction to the amount of money that the shareholder/member of the company has to pay in the event of the liquidation of an unlimited company.
Classification of Companies based on The Number of Members
Public Company (or Public Limited Company)
A public company is a corporation whose ownership is open to the public. In other words, anyone can buy the shares of a public company. There are no restrictions to the number of members of a public company or to the transferability of shares. However, there are some other restrictions:
- (In UK) A public limited company should have at least 2 shareholders and 2 directors, have allotted shares to the total value of at least £50,000, be registered with company house, and have a qualified company secretary.
- (In India) A public company should have at least 7 members and 3 directors, and issue a prospectus or file a statement in lieu of prospectus with the Registrar before allotting shares.
Private Company (or Private Limited Company)
A private company cannot be owned by the public; it restricts the number of members, the right to transfer its shares and prohibits any invitation to the public to subscribe for any shares or debentures of the company.
(In UK) A private company is a separate legal entity with a suitable company name, an address, at least one director, at least one shareholder, and memorandum of association and article of association.
(In India) A private company is a separate legal entity with a suitable company name, an address, at least 2 members and at most 200 members, and at least two directors with one being an Indian resident.
One Person Company
A one-person company is an Indian private limited company which has only one founder/promoter. The founder should be a natural person who is a country resident. There is also a threshold of paid-up capital (₹ 50 lakh) and average turnover (₹ 2 crores in 3 immediate preceding financial years) for a one-person
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