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ANAND ENGINEERING COLLEGE BBA PROGRAM CL

III
th
SEM UNIT - I
Akshay Singh | 1

Syllabus: Meaning, Definition and Characteristics of Company, Different types of Companies,
Privileges and Exemptions granted to a Private Company

Introduction
Limitations of traditional forms of business organizations i.e. sole trader-ship, partnership, led to
the advent of company form of organization. The traditional forms of organizations failed to
meet the increasing requirements of capital and skills needed for large-scale business enterprises.
Thus, to meet the capital and skills requirements the company form of organization came into
existence.

Another key factor which led to the rapid development of the company form of organization was
the reluctance on the part of the sole traders or partners to bear the brunt of unlimited liability.

The company form of organization furnished the organizers with twin advantage of limited
liability and huge capital resource, besides free transferability of shares and a separate legal
entity.

Definition of a "Company"
Sec. 3(1)(i) Of the companies act, 1956 merely states that, A company means a Company
formed and registered under this Act or an existing company
Or
An existing company as defined in Sec 3(1)(ii) Lays down, An existing company means a
company formed and registered under any of the previous companies law.

Lord Lindlay describes a company as an association of many persons who contribute money or
moneys worth to a common stock and employ it in some trade or business and share the profits
or losses arising therefrom

A COMPANY is an artificial Legal person, created by Law, having Separate entity, with a
perpetual succession and common seal.

A Company is a voluntary association of persons formed for the purpose of doing business,
having a distinct name and limited liability.

Thus, A company is a "corporation" - an artificial person created by law.
A human being is a "natural" person.
A company is a "legal" person.
A company thus has legal rights and obligations in the same way that a natural person does.

Characteristics of Company
1. Incorporated Association
A company is an incorporated or registered association. It is created either by an Act of
Legislature or by registration under the Companies Act. An unincorporated association cannot be
called a company.


ANAND ENGINEERING COLLEGE BBA PROGRAM CL
III
th
SEM UNIT - I
Akshay Singh | 2

2. Artificial Legal Person
A company is an artificial person as against a natural person. It is created by a process of law. It
has no physical existence. It has no body or soul or conscience. At the same time it enjoys certain
rights and has some obligations like a natural person. It can transfer property, enter into
contracts, sue or be sued and fined for violating the provisions of companies act.
3. Separate Legal Entity
After incorporation a company acquires a separate entity or what is called a juristic personality,
entirely distinct from the individual members constituting it. It has the right to own or transfer
property. It can sue and be sued in its own name by its members as well as outsiders.
CASE: Salomon Vs. Salomon CO. Ltd. Salmon was a leather merchant. He converted his
business into a ltd. company, Salomon CO. Ltd. The comp. so formed consisted of Salmon , his
wife and Five children as members. The company purchased the business of Salomon for 39,000
Dollars, the purchase consideration was paid in terms of 10,000 dollars debentures conferring a
charge over the companies assets 20,000 dollars in fully paid and 1 dollar share each and the
balance in cash. The company within a year ran into difficulties and liquidation proceedings
commenced. The assets of the company were not even sufficient to discharge the debentures
(held entirely by Salomon). And nothing was left for unsecured creditors. It was held by the
House of Lords that the company was validly constituted. The business belonged to the company
and not to Salomon.
4. Perpetual Succession
The term perpetual succession means continued existence. The life of the company is not
dependent on the life of the individual members constituting it. The death, insolvency, insanity
or retirement of any member or director does not affect the life of the company.
5. Limited Liability
The liability of every member of the company is limited to pay the face value of a share. If he
has paid the full amount due on his share, he will not be required to pay anything more to meet
the companys liability
6. Transferable Shares
Shares of a public limited company are freely transferable whereas the shares of a private limited
company are not freely transferable. A shareholder of public limited company can transfer his
share to any other person without the consent of other members.
7. Common Seal
A company is an artificial person so it cannot act by itself. It has to act through natural persons-
the directors. The directors, while entering into contracts on behalf of the company are required,
by law, to affix the companys seal as a token of its signature.
8. Separate Property
A company is capable of owing, enjoying, and also transferring property in its own name.
Although, its members or shareholders contribute its capital, yet they are not the joint owners of
the property of the company.
9. Capacity to sue and being Sued
A company has a distinct legal personality and hence can sue and be sued.

Distinction between Company and Partnership.
The principal points of distinction between a company and a partnership are:
1) Legal status- A company is a distinct legal person. A partnership firm is not distinct from the
several members who compose it.
ANAND ENGINEERING COLLEGE BBA PROGRAM CL
III
th
SEM UNIT - I
Akshay Singh | 3

2) Property- In partnership, the property of the firm is the property of the members comprising it. In
a company, it belongs to the company and not to the members comprising it.
3) Mode of creation- A company comes into existence after registration under the Companies Act,
1956, while registration is not compulsory in case of a partnership firm.
4) Agents- Partners are the agents of the firm, but members of a firm are not its agents.
5) Contracts- A partner cannot contract with his firm, whereas a member of a company can.
6) Transferability of shares- A partner cannot transfer his share and make the transferee a member
of the firm without the consent of other partners whereas a companys share can easily be transferred
unless the Articles provide otherwise and the transferee becomes a member of the firm.
7) Liability- A partners share is always unlimited whereas that of a shareholder may be limited
either by shares or a guarantee.
8) Perpetual succession- The death or insolvency of a shareholder or all of them does not affect the
life of the company, whereas the death or insolvency of a partner dissolves the firm, unless otherwise
provided.
9) Audit- A company is legally required to have its accounts audited annually by a chartered
accountant, whereas the accounts of the partnership are audited at the discretion of its members.
10) Number of members- The minimum number of partners in a firm is 2 and maximum is 20 in
any business and 10 in banking business. In case of a private company the minimum number of
members are 2 and maximum is 50. In case of a public company the min num of members are 7 and
no max limit.
11) Dissolution- a company can only be dissolved as laid down by law. A partnership firm can be
dissolved at any time by an agreement.

Types of Companies
Basis of Classification
I. Basis of Creation i) Chartered Companies
ii) Statutory Companies
iii) Incorporated or Registered Companies
II. Basis of Liability i) Companies limited by shares
ii) Companies limited by guarantee
iii) Unlimited Companies
III. Basis of number i) Private Company
Of members ii) Public Company
IV. Basis of Ownership i) Government Company
ii) Non-government Company
V. Basis of control of a unit i) Holding Company
ii) Subsidiary Company
VI. Basis of National Interest i) Indian Company
ii) Foreign Company


I. Basis of Creation
i) Chartered Companies: In olden times, kings by virtue of the- powers vested in
them, used to create companies by granting Royal Charter. Such companies were
known as chartered companies. Companies act did not apply to them. Examples The
Bank of England, The East India Company.
ANAND ENGINEERING COLLEGE BBA PROGRAM CL
III
th
SEM UNIT - I
Akshay Singh | 4

ii) Statutory Companies: Such a company is created by special Acts of Parliament or
State legislature. These are incorporated to carry on the business of national
importance. Example RBI, LIC, FCI, etc. Such companies need not use word limited
in the end of their name.
iii) Incorporated or registered Companies: A company registered under the companies
act is known as registered or incorporated company. Such companies may be public
or private, with limited or unlimited liability, having share capital or no capital.

II. On Basis of Liability
i) Limited by shares: A company whose members liability is limited to the face value
of the shares held by them is a company limited by shares. The unpaid amount on the
shares may be called up by the company at any time. By far the largest number of
companies is of this time.
ii) Limited by guarantee: Companies formed for non-trading purposes, e.g. for
promotion of art, science, culture, sports, etc are limited by guarantee.
1. Limited Company
Limited by Shares In such companies, the liability is only the amount which remains
unpaid on the shares.
Limited by Guarantee not having share capital In this type of companies the
memorandum of Association limits the members liability. It will be based on the
undertaking that has been given in MOA for their contribution in case of a winding up.
Limited by guarantee having share capital In such cases, the liability would be based
on the MOA towards the guaranteed amount and the remaining would be from the unpaid
sums of the shares held by the person concerned.
2. Unlimited Company
There is no limit on the liability of the members. The liability in such cases would extend
to the whole amount of the companys debts and liabilities.
Here the members cannot be directly sued by the creditors.
When the company is wound up, the official liquidator will call upon the members to
discharge the liability.
The details of the number of members with which the company is registered and the
amount of share capital has to be stated in the Articles of Association (AOA).

III. Basis of Number of Members: Refer to the distinction between private and public
limited company for these point.
i) Private Company
ii) Public Company

IV. On the Basis of Ownership
i) Government Company: A company in which not less than 51% of the paid up share
capital is held by the central or state governments, or both is a government company.
ii) Non-government Company: Companies which are not government companies i.e.
which are not owned and controlled by the central or state governments are called
non-government companies. A public limited company is usually a non-government
company.

ANAND ENGINEERING COLLEGE BBA PROGRAM CL
III
th
SEM UNIT - I
Akshay Singh | 5

V. On the Basis of Control
i) Holding Company: A company which controls the management of another company
is known as holding company.
ii) Subsidiary Company: The other company whose management is so controlled is
known as subsidiary company. Sec. 4 of the companies act 1956 defines a holding
company and subsidiary company by explaining the circumstances in which a
company, shall be deemed to be a subsidiary of another.
VI. On the Basis of National Interest
i) Indian Company: A company incorporated in India and having a place of business in
India is an Indian company. However all other companies, unless those are foreign
companies, are Indian companies.
ii) Foreign Company: A company incorporated outside India and establishing a place of
business within India, before or after the commencement of the companies act 1956,
is known as foreign company(Sec. 591)

Exemption and Privileges of a Private company
1. Minimum number is members is 2 (7 in case of public companies)
2. Prohibition of allotment of the shares or debentures in certain cases unless statement in lieu
of prospectus has been delivered to the Registrar of Companies does not apply.
3. Restriction contained in Section 81 related to the rights issues of share capital does not apply.
A special resolution to issue shares to non-members is not required in case of a private company.
4. Restriction contained in Section 149 on commencement of business by a company does not
apply. A private company does not need a separate certificate of commencement of business.
5. Provisions of Section 165 relating to statutory meeting and submission of statutory report do
not apply.
6. One (if 7 or less members are present) or two members (if more than 7 members are present)
present in person at a meeting of the company can demand a poll.
7. In case of a private company which not a subsidiary of a public limited company or in the
case of a private company or more body corporate incorporated outside India, no person other
than the member of the company concerned shall be entitled to inspect or obtain the copies of
profit and loss account of that company.
8. Minimum number of directors is only two. (3 in case of a public company)
9. It need not hold statutory meeting or file statutory report with the ROC.

Difference between Private Company and Public Company
Private Company Public Company
1. Minimum No. of members is 2.
2. Maximum No. of members should not
exceed 50.
3. Right to transfer is restricted.
4. Prospectus cannot be issued.

5. No. of directors must be at least 2.
6. Commence business immediately after
getting the certificate of incorporation.

1. Minimum No. of members is 7
2. No restriction.

3. Freely Transferable.
4. Through prospectus general public is invited
to subscribe for shares, debentures or deposits
5. Must have at least Three.
6. Can only start after receiving the certificate
to commence business from Registrar Of
Companies.
ANAND ENGINEERING COLLEGE BBA PROGRAM CL
III
th
SEM UNIT - I
Akshay Singh | 6

7. Directors consent to work as a director
with the Registrar is not necessary.
8. Directors can be approved by single
resolution.
9. No. of directors may be increased to
any number.
10. Directors are not required to retire by
rotation.
11. Managerial remuneration no restriction.

12. Quorum for general meeting is 2
13. Can be registered with a paid up capital
of Rs. 1Lakh
14. Exempted from filing of various returns
15. Cannot accept deposits from public
7. Necessary

8. Each directors appointment requires
separate resolution.
9. Not more than 12 without the approval
of the Central Government.
10. At least 2/3 of directors must retire
by rotation.
11. Not more than 11% of the net Profit (not
more than 5% to single manager/ director).
12. Five members
13. Rs. 5 Lakh

14. Not so exempted
15. Can accept deposits.

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