Financial Economics: Key Concepts

A company is considered as a unit that consists of a corporate legal entity. A company itself has different legal entities and possesses a common authentication that is used for its signature. This licence is shared across one or more members of a company depending upon its own and designations of the members.

What are the Essential Features of a Company?

According to the Indian Companies Act 1956, the characteristic features of a company not only define a corporate body but also determine its purpose. Each company has a unique characteristic feature owing to which it gains success in the market. 

Check Your Progress

• According to Which Act, Does a Company and its Features Rely On?

a. Indian Companies Act 1947

b. Indian Companies Act 2013

c. Indian Companies Act 1956

d. None of them

• A Company is Regarded as a Separate Entity Which has its Own Legal Presence. This Statement is –

a. True

b. False

Explanation of the Important Features a Company

According to the illustration above, it is clear that there are 8 vital characteristic features of a company, as explained in detail in the Indian Companies Act 1956. These important features of a company are –

A. Incorporated Association

• As discussed above, a company is considered as an association of individuals that abide by the laws of a country. In India, every company is required to be registered under the Companies Act 1956, else any corporate body will go unrecognized as an organization by the Indian laws and jurisdictions. 

• To be incorporated, a company needs to be registered with its official documents authenticated by the Registrar of Companies.

• Among such documents, the Memorandum of Association deserves mention. This essential document comprises the terms and conditions along with the stated purposes for which a company is created. 

• Other important documents of any company include Articles of Association and Registration Certificate. The former contains all the rules and regulations which govern the company and its activities. The latter is also referred to as a Certificate of Incorporation and is used to grant a legal entity to a company.

B. Independent Legal Entity

• As per the Companies Act 1956, every company possesses a legal entity that is separate from its constituent shareholders and members. It can also be termed as an autonomous body that has the power to open a bank account under its own name. It can also sue and be sued by its own members or other parties.

• All the rights which a company owner or major shareholder holds are separate from the rights and obligations of the company itself. As per the Companies Act, shareholders are not legally designated as owners of the undertaking. So, the undertaking is a totally separate entity for which shareholders are not liable.

C. Separate Property

• According to this feature, a company is stated as a unique property, and its members do not hold any direct proprietary rights to the company property. A company’s members are only allowed to possess rights to their corporate shares.

• If there is any alteration in the constitution of the membership of a company, there should be no changes in the property rights of the company.

• For example, Sen holds the major shares of a company ABC Ltd. Sen is not the owner of the property of ABC Ltd. Moreover, Roy and Dutta, whose combined shares are more than Sen, also cannot claim any ownership rights of the property of ABC Ltd. jointly. 

D. Perpetual Existence

• Every company has a perpetual existence; it can never be allotted a certain period after which it will be inactive. A company’s existence can only be terminated by law. Such actions mainly include the transfer of shares to new members or owners. 

• Regarded as an artificial individual, even if all members of a company leave, the company itself will still exist. It can survive through contracts and future agreements and become active again. In this way, the name of the company or its members might change, but it will always possess the same identification during its registration under the Companies Act 1956.

E. Common Stamp

• A company is driven by its core members who lay out the primary orders; who are termed as directors. Directors not only act as agents for a company but also to all its members. All the activities of a company are authorized by its common seal.

• The common seal of a company can be defined as its official signature, which is usually designed and approved by its directors. Any document issued by a company without its common seal will not be recognized as an official document.

F. Separation of Ownership and Management

• A company may have multiple shareholders and, in several cases, the number of shareholders may be large enough to be responsible for managerial affairs. So, shareholders usually hire directors who take the responsibility of running all the daily operations of a company.

G. Transferability of Shares

• As per the Indian Companies Act 1956, shareholders of a company have the right to transfer ownership of their shares to an interested buyer. In most cases, the shares of a public company are transferable without any hassle, but several legal matters can be involved in the transfer of shares of a private company.

H. Limited Liability

• The liability of a company is quite different from the liability of its shareholders. Generally, shareholders possess limited liability up to an extent of unpaid values of shares that are currently outstanding. 

• At Vedantu, we hope that our study material on Features of a Company will be helpful for your coming Boards exams. Make sure to visit our website and take part in our fun and interactive learning experience!

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Features of a Private Company

1. Limited Membership: A private company can have a minimum of 2 members and a maximum of 200 (excluding employees).

2. Restriction on Share Transfer: Shares cannot be freely transferred and are restricted to maintain privacy.

3. No Need to Issue Prospectus: Since shares are not offered to the public, there is no requirement to issue a prospectus.

4. Separate Legal Entity: A private company has its own legal identity, separate from its members.

5. No Minimum Paid-up Capital Requirement: The Companies Act, 2013, removed the minimum capital requirement for private companies in India.

Features of a Government Company

1. Majority Ownership by Government: The government (central, state, or both) holds at least 51% of the paid-up share capital.

2. Separate Legal Entity: It is established under the Companies Act and operates as an independent legal entity.

3. Public Accountability: It is subject to audits and scrutiny by the Comptroller and Auditor General (CAG).

4. Commercial Objectives: A government company often operates with profit motives while fulfilling public service obligations.

5. Appointment of Board Members: Directors are often appointed by the government, with some positions held by bureaucrats or public officials.

Features of a Public Company

1. No Maximum Membership Limit: A public company can have unlimited members, but a minimum of 7 members is required.

2. Shares Freely Transferable: Shares can be freely bought or sold on stock exchanges.

3. Issue of Prospectus: A prospectus must be issued when raising capital from the public.

4. Separate Legal Entity: It has its own legal identity, distinct from shareholders and directors.

5. Public Accountability: A public company is subject to more stringent regulations and disclosures, ensuring transparency.

Conclusion

Companies form the backbone of any economic framework by providing structure and organization to various business activities. Whether it is a private company with limited membership and privacy-oriented operations, a government company focusing on public welfare while maintaining profitability, or a public company with widespread ownership and transparency, each type of company has distinct features that cater to its goals and stakeholders. The essential characteristics, such as limited liability, perpetual existence, and a separate legal entity, ensure that companies operate efficiently within the legal framework while contributing to economic growth and societal progress.