What is Company? What are its Features?

>> December 26, 2009





Introduction

In corporate accounting , commerce students have to learn accounting treatment of issue of share capital , debenture and its redemption , bonus and right issue at graduation level . They also have to solve the problems of final accounts of different companies . For proper accounting treatment , learning of Indian Company Law 1956 is must . So , this topic is being discussed here. If you are starting to learn Company or Corporate Accounting , then this article will be useful for you because after reading this article , you will understand , the brief history , meaning , definition of Company and its six features .

History

First of All, in France this word was used for body of soldiers see [Fr. Term Compaignie].. After year 1500, this word became famous in business. Group of businessmen was called company.

Example

I can explain the meaning of company with a simple example. Suppose, two persons want to do business at large scale but they have limited money. They are also not interested to make partnership due to its unlimited liability. They go to the office of registrar of companies and fill the form of creation of company and attaching required documents. They also pay the required fees. After this, registrar will register their company. This registered company will be independent Identity.

Definition of Company

Indian Company law 1956’s section 3(1) (i) define company, “Company is the organisation which is formed and registered under this law or any previous law”

Explanation of Company

From above example and definition, we can understand that company is voluntary and autonomous association of persons. This is made for achieving business objectives. It acts like human being. Company can purchase assets or sell it. It can take also debt. It can open bank account. It is fully free from its members. Company is operated through board of directors.

Company vs. Corporation

There is no solid difference between Company and Corporation. But , these days Corporation word is mostly used in finance area because this word is most popular in USA economy . Media is also publishing all stories of Industries by using Corporation as keyword in India. All features of Company like a separate legal entity having its own rights, own property , sign binding contracts , privileges, and liabilities distinct from those of its members can be seen in Corporation .

Features of Company:-

1. Separate legal entity

It is the feature of company that company is not just association of persons but it has separate legal entity. It is an artificial person in the eye of law. Its asset is not the asset of shareholder. It can contract with members. This feature was firstly accepted in Salomon vs Salomon and Company ltd. Salomon was the dealer and manufacturer of leather boot and shoe. He had a wife, a daughter and other five sons. He sold his business to Salomon and company ltd which he made himself he also made his family as its shareholder. His wife, daughter and his other four sons purchased one share of this company and rest, he purchased. He purchased £ 20000 shares and £ 10000 shares. After one, due to economic trouble and other reasons business failed and the company was put into liquidation. At that time financial position of company was
Assets £6000
Debentures £10000
Unsecured Creditors £ 7000
External creditors demanded their money because Solomon and Solomon Company were both one person and this business was of Solomon and it was being operated by him. It was a fraud. But
The House held:
"Either the limited company was a legal entity or it was not. If it were, the business belonged to it and not to Mr. Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not."
The House further noted:
"The company is at law a different person altogether from the [shareholders] ...; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any shape or form, except to the extent and in the manner provided for by the Act."
In end court decided that Solomon and company are different from Solomon and Solomon is secured creditor. So his given loan should be returned first.

2. Separate Property

It is also feature of company that property of company is different from its members. It can purchase or sell property without the permission of shareholders. In other words, assets of company are not the assets of members like partnership.

3. Limited Liability

Limited liability is also another important feature of company. It is the reason that large number of investors invest in limited liability companies. It is the liability of company to repay not the liability of its members. Members’ liability is only limited up to the purchased value of shares. They have to pay balance amount of their shares.

4. Perpetual Succession

The life of company is very stable that human being’s life. There is no effect of changing, death, insolvency of respected member on company. Its existence is not affected by members’ existence. Shares can easily transfer from one member to another member, so liquidation of company is only possible by law.

5. Common Seal

Company can not sign on any contract because it is artificial person and it works with common seal. Every document of contract with company is only valid, if there is common seal of company on it.

6 Right to Sue

Company can sue on other parties like natural person for protecting its assets and properties. Other persons can also charge on the company.





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