Accountancy · Ch 5 — Accounting for Share Capital
Features of a Company
Features of a Company
A company is not just a group of people pooling money for a common goal. Legally, it is an artificial person — created by law, invisible and intangible, but with a distinct identity of its own. This identity is separate from the people who own it (the shareholders). Because of this, a company has a set of special features that no other form of business organisation (like a sole proprietorship or partnership) possesses.
Here are those features, explained in the order the textbook presents them.
Body Corporate
A company comes into existence only when it is formed and registered under the law of the land. In India, most companies are registered under the Companies Act (the current one being the Companies Act, 2013). However, special laws apply to banking and insurance companies. This legal birth makes it a "body corporate" — a formal, recognised entity.
Separate Legal Entity
This is the most important feature. The company is a person in the eyes of the law, completely distinct from its members. It can:
- Own property in its own name.
- Enter into contracts.
- Open a bank account.
- Sue others and be sued.
The shareholders are not the company. If a shareholder dies or becomes insolvent, the company's life and assets remain untouched. The company's debts are its own, not the shareholders' personal debts.
Limited Liability
The liability of the members (shareholders) is limited. For a company limited by shares (the most common type), a shareholder's liability is limited to the unpaid amount on the shares they hold.
If you buy a ₹10 share and pay ₹8, your maximum liability is the remaining ₹2. If the company goes bankrupt, creditors cannot touch your personal assets beyond that unpaid amount.
For a company limited by guarantee, the liability is limited to the amount each member has guaranteed to pay if the company is wound up.
Perpetual Succession
"Members may come and go, but the company continues forever." A company is created by law and can only be terminated by law (through a process called winding up). The death, insanity, or insolvency of any shareholder has no effect on the company's existence. It has a perpetual life.
Common Seal
Since a company is an artificial person, it cannot physically sign its name. Therefore, every company must have a common seal — a metal stamp that acts as its official signature. Any document that does not carry the common seal is not legally binding on the company.
A document without the common seal is not binding on the company. This is a critical point for exam questions on the validity of contracts.