What is a Company? Definition, Features, and Types

A company is a legal entity formed by a group of individuals to engage in and operate a business—commercial or industrial—enterprise. Companies can vary in size and scope, from small sole proprietorships to large multinational corporations. Understanding what a company is and how it operates is crucial for anyone interested in the business world.

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Meaning of Company

The English word “company” originates from the Latin word “companis,” which is composed of two parts: “com” meaning “together” and “panis” meaning “bread.” Initially, the term referred to a group of people who ate their meals together. According to Alfred Palmer, “In ancient times, people of the business class considered it appropriate to discuss their business problems during public meals.” Gradually, these businessmen began forming their own associations, which later came to be called companies. Nowadays, companies refer to associations where joint capital is invested

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Nature and Characteristics of a Company

When studying and analyzing the definitions of a company, several key characteristics emerge:

• Incorporated Association: A company is legally formed (born) by law and exists as long as it is recognized by law. Under the Company Act, it is mandatory for a company to be formed and incorporated. Any association or institution established for the purpose of earning profit, with more than 10 members for banking business and more than 20 for ordinary business, must be registered under the law.
• Artificial Person: In the legal world, a company is granted a special status known as an “artificial person.” This means its existence is established by law, separate from the individuals who create it. Unlike a natural person, a company lacks a physical body or the capacity for emotions. It cannot perform actions like taking oaths or appearing in court personally. However, companies are not simply made-up entities. They possess the legal authority to buy and sell property, enter into binding agreements, hire employees, and face consequences for violating the law, much like a natural person. This legal distinction allows companies to operate with a degree of autonomy and continuity, independent of the individuals involved.
• Separate Legal Entity: The most important feature of a company is its separate legal entity. After incorporation under the Companies Act, a company has a distinct existence from its members. Consequently, the company can enter into contracts with its members, hold property in its name, transact money, open a bank account, sue others, and be sued by others. In other words, a company can perform all the activities that a natural person does to conduct private business.
• Perpetual Succession: A company’s perpetual existence is another critical feature. Its life does not depend on the life of its members or directors. The members of the company may change, but the company continues to operate smoothly. The death, bankruptcy, or insanity of members has no effect on the company’s existence. Members may come and go, but the company endures. As Owen stated, “The modern corporation, with its continuous existence despite its changing membership, has been compared to a river which retains its identity even though its parts are constantly changing.” According to Prof. Grover, “During a war, all the members of a private company were killed by a bomb during a general meeting, but the company survived. Even a hydrogen bomb could not destroy the company.”
• Common Seal: Since companies lack the ability to physically sign documents, the law requires them to have a “common seal.” This unique stamp, engraved with the company’s name, serves as a symbol of its official authorization. Crucially, documents lacking the common seal may not be considered legally binding for the company. Instead, personal liability might fall on the individual who signed them. The specific regulations surrounding the use of the common seal are typically outlined in the company’s articles of association.
• Limited Liability: The liability of each shareholder of the company is generally limited. In case of loss, the company’s creditors cannot interfere with the shareholders’ personal property. For example, if a person buys 100 shares of a company with a face value of ₹10 each, no more than ₹1,000 can be demanded from them. This principle means that in case of winding up, the liability of the members is limited to the face value of the shares they purchased. In companies limited by guarantee, the liability of members is limited to the amount guaranteed.
• Number of Members: In a public company, the number of members ranges from a minimum of seven to the maximum number of shares issued. In a private company, the number of members ranges from a minimum of two to a maximum of 200 (excluding present and past employees).
• Company is Not a Citizen: Although a company is a legal person, it is not considered a citizen under Article 19 of the Indian Constitution. It does not have the right to exercise fundamental rights like a citizen and cannot file a suit for such rights. For example, a company does not have the right to vote. This was clarified by Justice Hidayatullah in the case of State Trading Corporation of India Vs. Commercial Tax Officer. According to the judgment, “Although a company is a legal person, it is not considered a citizen either under the Constitution or the Citizenship Act. While a company cannot be a citizen, it has a nationality. The nationality of a company is identified with the place where it is incorporated. A company incorporated in India is an Indian company, even if all its members are foreigners.“

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Types of Companies

When starting a business or considering your options, it’s essential to understand the different types of companies. Each type has its own benefits and drawbacks. Here’s a simple guide to help you choose the right one for your needs.

1. Sole Proprietorship

A sole proprietorship is the simplest type of business. It is owned and run by one person.

Pros:

• Easy to set up and manage
• Complete control over the business
• All profits go to the owner

Cons:

• Unlimited personal liability (you are responsible for all debts)
• Limited ability to raise money

2. Partnership

What is it? A partnership involves two or more people who share ownership and responsibilities.

Pros:

• Easy to form
• Shared decision-making and responsibility
• More capital to invest

Cons:

• Joint liability for debts
• Potential for disputes among partners

3. Limited Liability Company (LLC)

What is it? An LLC combines the flexibility of a partnership with the liability protection of a corporation.

Pros:

• Limited personal liability (your assets are protected)
• Flexible management and tax options
• Less paperwork compared to corporations

Cons:

• Can be more expensive to set up than a sole proprietorship or partnership
• Some states have higher fees

4. Corporation

What is it? A corporation is a more complex business structure. It is a legal entity separate from its owners, with its own rights and responsibilities.

Pros:

• Limited liability for owners
• Easier to raise funds through stock
• Perpetual existence (the business continues even if the owner leaves)

Cons:

• More expensive and complicated to set up
• Subject to more regulations and taxes

5. S Corporation

What is it? An S corporation is a special type of corporation that avoids double taxation. The profits and losses are passed through to the owners’ personal tax returns.

Pros:

• Avoids double taxation on corporate income
• Limited liability for owners
• Perpetual existence

Cons:

• Strict eligibility requirements (e.g., number of shareholders)
• More paperwork and legal requirements

6. Nonprofit Organization

What is it? A nonprofit organization is set up to pursue charitable, educational, or social goals rather than making a profit.

Pros:

• Tax-exempt status
• Ability to receive donations and grants
• Limited liability for directors and officers

Cons:

• Must adhere to strict regulations and reporting requirements
• Profits cannot be distributed to members or directors

Conclusion

Understanding the nature of a company is crucial for anyone involved in business. Its unique characteristics, such as being a separate legal entity, offering limited liability, and ensuring perpetual succession, make it an attractive and robust structure for conducting business. These features provide the foundation for the company’s operations, contributing to its ability to grow, attract investment, and achieve long-term success.

FAQ on Characteristics of a Company