What are The Features of Company
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.
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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.
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Key Points to Excel in Commerce Subjects
1. NCERTs are like the Holy books for the students
The subject Commerce includes three main subjects. They are namely, Business, Accounts, and Economics. These subjects require deep learning and understanding of NCERT Text. The crux of the essence of the subject is in the chapters of NCERT. Hence, it is advised for the students to read NCERTs with utmost focus and attention.
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Commerce is a practical subject that involves the observation and study of ever-changing trends in society. By Learning and using examples from real-life experiences, students will develop a dynamic approach that will highly benefit them especially in the subjects of Business studies and Macroeconomics.
3. Consistency Never Fails
No matter how tempting the shortcuts might look, the power of consistency beats all. Here this consistency includes Frequent Revision of what is read and learned, Solving Previous Year's Question Papers and Sample question papers to get a check on progress made, Skimming through Important Questions for a day before exam preparation, and so on. But the most important of all these is to make Notes. This is actually a cheat sheet to beat mediocrity with genius with less effort and more fun. Making our own notes and getting them checked by teachers helps students in writing skills, revision, improved vocabulary, and speedy writing that will assist students to touch the academic heights in Commerce or for that matter, in any subject.
Features of a Private Company
Limited Membership: A private company can have a minimum of 2 members and a maximum of 200 (excluding employees).
Restriction on Share Transfer: Shares cannot be freely transferred and are restricted to maintain privacy.
No Need to Issue Prospectus: Since shares are not offered to the public, there is no requirement to issue a prospectus.
Separate Legal Entity: A private company has its own legal identity, separate from its members.
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
Majority Ownership by Government: The government (central, state, or both) holds at least 51% of the paid-up share capital.
Separate Legal Entity: It is established under the Companies Act and operates as an independent legal entity.
Public Accountability: It is subject to audits and scrutiny by the Comptroller and Auditor General (CAG).
Commercial Objectives: A government company often operates with profit motives while fulfilling public service obligations.
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
No Maximum Membership Limit: A public company can have unlimited members, but a minimum of 7 members is required.
Shares Freely Transferable: Shares can be freely bought or sold on stock exchanges.
Issue of Prospectus: A prospectus must be issued when raising capital from the public.
Separate Legal Entity: It has its own legal identity, distinct from shareholders and directors.
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.
FAQs on Financial Economics: Key Concepts
1. What is financial economics and why is it important for Commerce students?
Financial economics is a branch of economics that studies the interrelation of financial variables, such as prices, interest rates, and shares, in a world of uncertainty. For Commerce students, it is crucial as it provides the theoretical foundation for understanding corporate finance, investment decisions, financial markets, and risk management, which are core components of the CBSE syllabus for the 2025-26 session.
2. What is the fundamental concept of the Time Value of Money (TVM)?
The Time Value of Money (TVM) is the core principle that a sum of money is worth more now than the same sum will be at a future date due to its potential earning capacity. This concept is fundamental to financial decisions like investment appraisal, loan valuation, and retirement planning. For example, ₹100 today invested at 5% interest will be worth ₹105 in a year, making the present value more valuable.
3. What are the main components of financial markets studied in financial economics?
Financial economics primarily focuses on two main components of financial markets:
- Capital Markets: These are markets for long-term funds, involving instruments like stocks and bonds. They facilitate capital formation and economic growth.
- Money Markets: These are markets for short-term borrowing and lending, with instruments like commercial papers and treasury bills, which are crucial for managing liquidity.
4. What is the relationship between risk and return in financial economics?
In financial economics, risk and return are directly proportional. The risk-return tradeoff is a fundamental principle stating that higher potential returns on an investment are generally associated with higher risk. Investors demand a higher return as compensation for taking on more uncertainty or risk of loss. This concept is central to asset pricing and portfolio management.
5. How does the principle of arbitrage help in keeping financial markets efficient?
Arbitrage is the practice of simultaneously buying and selling an asset in different markets to profit from a temporary price discrepancy. The actions of arbitrageurs almost instantly close these price gaps, forcing the price of the asset to be uniform across markets. This process ensures that assets are priced correctly and makes the market more efficient, as it eliminates such risk-free profit opportunities.
6. Why is the concept of 'risk' in financial economics more than just the possibility of losing money?
In financial economics, 'risk' is a broader concept that refers to the uncertainty or variability of future returns. It includes not just the downside risk (losing money) but also the possibility that an investment's actual return will be different from its expected return. This includes volatility and the opportunity cost of choosing one investment over another. Understanding this helps in building a diversified portfolio to manage overall uncertainty, not just avoid losses.
7. What is the main difference between financial economics and managerial economics?
The primary difference lies in their scope and focus. Financial economics deals with the functioning of financial markets, asset pricing, and investment decisions under uncertainty. In contrast, managerial economics applies microeconomic principles to business decision-making within a firm, focusing on topics like production, pricing, and resource allocation to maximise the firm's objectives.
8. How does the Efficient Market Hypothesis (EMH) apply to a typical investor?
The Efficient Market Hypothesis (EMH) suggests that asset prices fully reflect all available information. For a typical investor, this implies that it is extremely difficult to consistently achieve higher-than-average market returns (or "beat the market") through stock picking or market timing. It supports the strategy of investing in a diversified, low-cost index fund rather than trying to find undervalued stocks based on easily accessible information.
