
Company Form of Business
The company form of organization occupies a pivotal place in the present-day business world. Common consumer items like soaps, matches, biscuits, washing powder, bread, etc., and major industrial goods like coal, steel, plastic, computers, etc., are mostly produced and distributed by companies. You may be aware of companies like NTPC, ONGC, Hindustan Lever, HMT, BHEL, TISCO. Let us examine how a company like NHPC is distinct from a small trader in your locality from the viewpoint of organizational setup or legal position.
Origin and Meaning of Company.
The origin of the company form of business started with the enactment of the Joint Stock Companies Act 1913. Companies like the Reserve Bank of India and State Bank of India came into existence through a special act of Parliament. Such companies are not governed by the Companies Act and are called Statutory companies. Currently, the Companies Act 1956 controls all the activities of a company, from its formation to winding up.
According to Section 3 (1) (i) of the Companies Act, a company is defined as "a company formed and registered under the act or an existing Company." An existing company refers to "a company formed and registered under any of the previous companies laws."
Definition of a Company: A company can be seen as an association of individuals who contribute money or money's worth to a common stock and utilize it for a common purpose. It is a creation of the law and is also referred to as an artificial person. A company has a capital divided into transferable shares, possesses a corporate legal entity, and a common seal. Despite being created by its members, a company is separate and distinct from its members.
Special features of a Company:
We observe the following special features of companies in the definition and the statutory provisions under the Companies Act:
Voluntary Association: Individuals who form a company come together voluntarily to carry out a business.
Limited Liability: A company may be limited by guarantee or limited by shares, and this is the main feature of a company. The liability of a member is limited to the unpaid amount of shares held by them in a company limited by shares. No member is obligated to contribute more than the nominal value of the shares they hold. For instance, if a share has a face value of Rs. 100 and the shareholder has paid Rs. 80, their liability is limited to only Rs. 20 (the difference between the face value and the amount already paid). Their liability is restricted to the face value of the share, i.e., Rs. 100. If a shareholder holds more than one share, their liability is limited to the number of shares they hold. For example, if a shareholder holds 100 shares in a company, their liability is limited to Rs. 100 x 100 shares = Rs. 10,000.
In the case of a company limited by guarantee, the liability of a member is limited to the amount guaranteed by them to contribute to the company's assets.
Separate Legal Entity: Separate legal entity means that the company is distinct and independent from its members. Accordingly, a company can purchase, sell, and hold properties, enter into contracts with others, including its own shareholders, and open bank accounts in its own name. Therefore, a company has a separate legal identity.
Perpetual Succession: A company continues to exist irrespective of changes in its membership because it is an artificial person that never dies. Additionally, the death or insolvency of an individual member does not affect the continuity of the company.
Transferability of Shares: A member can buy or sell shares of a company in the open market as they are transferable. This facility provides liquidity to the investment of a company's members. A company cannot restrict or prevent a shareholder's absolute right to transfer ownership through provisions in its articles. However, the articles of a company can prescribe the manner in which share transfers can be carried out. Thus, a shareholder has the absolute right to transfer or hold the shares of the company as they desire.
Common Seal: A company cannot sign documents as it is an artificial person. This limitation is overcome by the use of a company seal. Whenever a signature is required, the company uses its common seal. The common seal acts as a substitute for its signature. Any document without the company seal is not considered authentic or binding on the company. By using the common company seal, it signs and enters into contracts.
Capacity to Sue and Be Sued: A company can sue and be sued in its own name, as it enjoys the status of an artificial person.
Separate Property: A company is a legal person and is distinct from its members. As a legal person, it is the owner of its assets and is bound by its liabilities. It is capable of owning, disposing of, and enjoying its property in its own name. Shareholders are not joint owners of the company's assets, even though they contribute the capital and assets to the company. Therefore, the property owned by the company does not belong to its shareholders.
Kinds of Companies
Companies can be categorized into three categories based on liability.
Companies limited by shares: In such companies, the liability of the shareholders is limited to the unpaid amount, if any, of the shares they hold. This liability can be enforced during the existence of the company as well as at the time of winding up. If the shares are fully paid, then the shareholder has no further liability.
Companies limited by guarantee: In the case of companies limited by guarantee, the liability of the members is limited to the amount they undertake to contribute in the event of the company being wound up. Thus, the liability arises only during the winding up process.
Unlimited Companies: In such companies, the liability of the members is not limited at all. They are obligated to contribute the necessary amount to pay off the company's debts and liabilities. However, such companies are not commonly found in practice.
A company can also be divided into two categories based on the number of members:
Private Company: According to the Companies Act, a private company is a company that, through its articles, restricts the right to transfer its shares, limits the number of its members to fifty (excluding employees), and prohibits any invitation to the public to subscribe for shares or debentures of the company.
Public Company: A public company refers to a company that is not a private company and has issued securities through an Initial Public Offering (IPO). It is traded on at least one stock exchange or in the over-the-counter market.
Advantages of Company Form of Organization
The company form of organization is one of the most prevalent and widely used forms in the business world. It offers several advantages and features that make it an attractive choice for entrepreneurs and investors. Here are some additional points about the company form of organization:
- Separate Legal Entity: A company is considered a separate legal entity distinct from its owners or shareholders. This means that the company can enter into contracts, own assets, sue or be sued, and conduct business activities in its own name. The shareholders are not personally liable for the company's debts or obligations beyond their investment in the company.
- Transferable Ownership: The ownership of a company is represented by shares, which are freely transferable among the shareholders. This allows for easy transfer of ownership and facilitates liquidity in investment. Shareholders can buy or sell their shares in the company through open markets or private transactions.
- Perpetual Existence: Unlike sole proprietorships or partnerships, which are dependent on the lifespan of their owners, a company has perpetual existence. It continues to exist even if there are changes in its ownership or management. The company's operations can carry on without disruption, providing stability and continuity.
- Limited Liability: One of the key advantages of the company form of organization is limited liability. Shareholders' liability is limited to the amount they have invested or agreed to contribute towards the company's capital. This protects shareholders' personal assets from being used to satisfy the company's debts or liabilities. It encourages investment and entrepreneurship by mitigating personal risk.
- Capital Generation: Companies have the ability to generate capital by issuing shares or other securities. They can attract investment from a wide range of sources, including individual investors, institutional investors, and venture capitalists. This capital can be utilized for business expansion, research and development, acquisitions, and other strategic initiatives.
- Professional Management: Companies often employ professional managers who possess specialized skills and expertise in managing the company's operations. This allows for efficient decision-making, effective resource allocation, and strategic planning. Professional management helps in maximizing the company's potential and achieving long-term growth.
- Regulatory Framework: Companies operate within a legal and regulatory framework that provides guidelines and standards for their governance, financial reporting, disclosure requirements, and shareholder rights. This framework helps ensure transparency, accountability, and fair treatment of all stakeholders involved.
- Access to Resources: Companies have greater access to resources compared to other forms of organization. They can raise capital through public offerings, bank loans, venture capital, or private equity investments. Additionally, companies can leverage their size, reputation, and financial strength to negotiate favorable terms with suppliers, obtain credit facilities, and access markets.
- Transfer of Ownership: In a company, ownership can be easily transferred through the buying and selling of shares. This allows for changes in ownership without disrupting the company's operations. It also provides flexibility for shareholders to exit or enter the company as per their investment goals or circumstances.
- Pooling of Resources: Companies enable the pooling of financial and non-financial resources from multiple shareholders. This collective investment allows for the mobilization of large amounts of capital, which can be utilized for ambitious projects, research and development, infrastructure investments, and market expansion. It reduces the burden on individual investors and promotes collaborative growth.
- Branding and Market Positioning: Companies have the ability to build strong brands and establish market positioning. A well-known company brand enhances customer trust, loyalty, and recognition. It also helps in attracting talented employees, securing partnerships, and gaining a competitive edge in the market.
- Limited Personal Risk: Shareholders of a company are shielded from personal risk beyond their investment in the company. This means that their personal assets are protected from the company's financial liabilities, lawsuits, or bankruptcy. This aspect provides a sense of security for investors and encourages them to participate in entrepreneurial ventures.
- Employee Incentives: Companies have the flexibility to offer employee incentives, such as stock options or employee share purchase plans. These programs allow employees to become shareholders and benefit from the company's growth and success. It aligns the interests of employees with the company's performance, fostering loyalty, motivation, and a sense of ownership among the workforce.
- Tax Benefits: Depending on the jurisdiction and applicable tax laws, companies may enjoy certain tax benefits or incentives. These can include deductions for business expenses, allowances for research and development investments, or favorable tax rates for specific industries. Such tax advantages can contribute to the overall financial viability and profitability of the company.
- Access to Specialized Skills: Companies often attract a diverse group of individuals with specialized skills and expertise. This includes professionals from various disciplines such as finance, marketing, human resources, and operations. The collective knowledge and experience of employees can significantly contribute to the growth and competitiveness of the company.
- Increased Borrowing Capacity: Companies generally have better access to borrowing funds from financial institutions due to their established legal structure and financial transparency. This allows them to obtain loans or credit facilities to support their growth strategies, working capital needs, or capital-intensive projects. The ability to secure financing provides companies with additional resources to pursue opportunities and expand their operations.
- Professional Network and Business Connections: Companies often have the opportunity to build a robust professional network and establish valuable business connections. This can be beneficial for partnerships, collaborations, strategic alliances, and accessing industry-specific knowledge. Companies can leverage their network to gain market insights, explore new opportunities, and stay ahead of industry trends.
- Brand Reputation and Trust: Over time, successful companies can develop a strong brand reputation and establish trust among customers, suppliers, and stakeholders. A reputable brand enhances credibility, attracts customers, and fosters long-term relationships. Trustworthy companies are more likely to gain customer loyalty, repeat business, and positive word-of-mouth referrals.
- Corporate Governance: Companies are typically subject to corporate governance practices and regulations, which aim to ensure ethical conduct, transparency, and accountability. Good corporate governance practices promote fairness, integrity, and responsible decision-making, protecting the interests of shareholders and stakeholders.
- Access to Skilled Workforce: Companies often have the advantage of attracting skilled employees who seek stable and professional work environments. The organizational structure, career development opportunities, and benefits offered by companies can attract top talent. A skilled workforce contributes to productivity, innovation, and the overall success of the company.
- Economies of Scale: Companies can achieve economies of scale through bulk purchasing, production efficiencies, and distribution networks. By operating at a larger scale, companies can lower their per-unit costs, increase profit margins, and gain a competitive advantage over smaller businesses.
- Succession Planning: Companies can implement succession planning strategies to ensure continuity in leadership and management. They can identify and groom potential successors, facilitate smooth transitions, and maintain stability even when key executives or shareholders retire or leave the company.
- Access to International Markets: Companies that operate globally can access a broader customer base and explore international market opportunities. This expansion increases the potential for revenue growth, diversification, and exposure to different cultures, trends, and consumer preferences.
- Research and Development Capabilities: Companies often have the resources and infrastructure to invest in research and development (R&D) activities. This enables them to innovate, develop new products or services, improve existing offerings, and stay competitive in dynamic markets. R&D capabilities contribute to long-term sustainability and market relevance.
- Social and Environmental Impact: Companies can have a significant social and environmental impact by implementing sustainable practices, corporate social responsibility initiatives, and philanthropic activities. They can contribute to community development, environmental conservation, and social causes, thereby enhancing their reputation and positively influencing society.
The company form of organization offers a wide range of advantages that enable businesses to thrive, grow, and adapt to changing market dynamics. From financial benefits to strategic advantages, companies have the potential to create value for their shareholders, employees, and communities. The company form of organization offers numerous benefits and advantages that make it a preferred choice for businesses seeking growth, capital mobilization, limited liability, and long-term sustainability. However, it also comes with certain regulatory and compliance requirements that ensure proper governance, transparency, and accountability to stakeholders.
In conclusion, the company form of organization holds a pivotal place in the business world, offering a range of advantages and features. From limited liability and transferable ownership to professional management and access to resources, companies provide a structured and scalable framework for businesses to thrive. With separate legal entity status, perpetual existence, and the ability to generate capital, companies foster growth, attract investment, and establish market positioning. Furthermore, the company form of organization enables entrepreneurs to pool resources, mitigate personal risk, and tap into a network of professionals and business connections. As businesses navigate the competitive landscape, the company form of organization remains a preferred choice, providing stability, opportunities, and the potential for long-term success.











