Section 3 (1) (i) of the Companies Act, 1956 defines a company as “a company formed and registered under this Act or an existing company”. In common parlance, a company means an association of two or more persons formed an artificial legal entity for some common object or object such as the economic gain of its members.
The definition of a company in law carries several distinct characteristics different from other business forms like sole proprietorships or partnerships. Some of the characteristics of a company are;
Artificial Legal Person:
A company is a legal entity created by law having the rights and responsibilities of a natural person, such as entering into contracts, owning assets, and suing or being sued. However, it is an artificial person, and cannot physically act; it operates through its Board of Directors.
Distinct Legal Entity:
A company has a distinct entity, independent of its members or people controlling it. It is regarded as a single juristic person distinct from its members who constitute the company. The principle of separate legal personality was affirmed in the Salomon case, protecting shareholders from personal liability for the company’s debts.
Limited Liability:
In a limited company, Shareholder’s liability is limited to the amount they’ve invested or guaranteed to the company. This ensures that the personal assets of shareholders are protected, even if the company faces financial difficulties.
Perpetual Succession:
The company’s existence is not affected by the death, insolvency, or retirement of its members. It continues to exist until it is legally dissolved through winding-up procedures.
Transferability of Shares:
Shares in a public company are freely transferable providing liquidity to investors, unless the company has a valid reason to disallow it. However, private companies may impose restrictions on share transfers through their Articles of Association.
Common Seal (Optional)
Though optional under the Companies Act 2013, many companies use a common seal as their official signature for validating documents.
Representative Management:
The shareholders elect a Board of Directors to manage the company’s affairs. The directors oversee the day-to-day operations of the company.
Voluntary Association for Profit:
In company law, voluntary association for profit means a company that is a group of people who come together to earn a profit. A company is formed voluntarily by individuals or entities to conduct business for profit. Profits are shared among shareholders as dividends.
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