What is meant by the word 'Company'? Describe its characteristics.

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Q. What is meant by the word 'Company'? Describe its characteristics.

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Concept understanding — Public Company Definition

Public Company – A First Look

Think of a business like a cricket team. A private company is like a club team – you need personal permission to join, and you can't sell your spot to just anyone. A public company is like an IPL franchise – anyone with money can buy a share (ticket) from the open market, and the team's performance is reported publicly.

That's the core intuition: a public company can raise money from the general public by issuing shares, and those shares can be freely traded on a stock exchange.

The Precise Meaning (NCERT Definition)

According to the Companies Act, 2013, a public company is defined under Section 2(71) as a company which:

Is not a private company
Has a minimum paid-up share capital of ₹5,00,000 (or higher as prescribed)
Can invite the public to subscribe to its shares or debentures
Has no restriction on the transfer of its shares
Must have at least 7 members (minimum) – no maximum limit
Must add "Limited" (Ltd.) at the end of its name

Note

A private company becomes a public company when it meets these conditions. The key difference is the ability to raise funds from the public and freely transfer shares.

Why It Matters

For a Class 12 student, understanding "public company" is crucial because:

Source of funds – It can raise huge capital from thousands of investors through Initial Public Offer (IPO).
Accounting complexity – More shareholders mean more legal requirements: separate Share Capital Account, Securities Premium Account, and detailed Profit and Loss Appropriation Account.
Dividend distribution – Profits are distributed as dividends to shareholders, which requires proper accounting treatment.
Legal compliance – Must prepare financial statements as per Schedule III of the Companies Act.

Accounting Treatment – The Core

When a public company issues shares, the accounting treatment depends on the stage:

1. On Receiving Application Money

When investors apply for shares, the company receives application money. The entry is:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	X
To Share Application A/c		X
(Being application money received)

2. On Allotment of Shares

When shares are allotted, the application money is transferred to Share Capital:

Particulars	Debit (₹)	Credit (₹)
Share Application A/c Dr.	X
To Share Capital A/c		X
(Being application money transferred to share capital)

3. On Receiving Allotment Money

If allotment money is due and then received:

Particulars	Debit (₹)	Credit (₹)
Share Allotment A/c Dr.	Y
To Share Capital A/c		Y
(Being allotment money due)
Bank A/c Dr.	Y
To Share Allotment A/c		Y
(Being allotment money received)

4. On Calls (First Call, Final Call)

Similar treatment – each call is recorded separately:

Particulars	Debit (₹)	Credit (₹)
Share First Call A/c Dr.	Z
To Share Capital A/c		Z
(Being first call money due)
Bank A/c Dr.	Z
To Share First Call A/c		Z
(Being first call money received)

Important

All these accounts (Share Application, Share Allotment, Share Calls) are personal accounts – they represent amounts due from or received from shareholders. They are temporary accounts that get closed when the money is received and transferred to Share Capital.

The Share Capital Account Format (as per NCERT)

The Share Capital Account is a permanent account shown in the Balance Sheet under Equity and Liabilities. Here's the format:

Particulars	Amount (₹)
Authorised Capital
10,000 Equity Shares of ₹10 each	1,00,000
Issued Capital
8,000 Equity Shares of ₹10 each	80,000
Subscribed Capital
7,500 Equity Shares of ₹10 each	75,000
Called-up Capital
7,500 Equity Shares of ₹10 each (₹8 called-up)	60,000
Paid-up Capital
7,500 Equity Shares of ₹10 each (₹8 paid-up)	60,000
Less: Calls-in-Arrears	(2,000)
Net Paid-up Capital	58,000

Watch out

A common mistake: Students confuse Authorised Capital (maximum shares the company can issue) with Issued Capital (shares actually offered to public). They are NOT the same.

Profit and Loss Appropriation Account (for a Public Company)

When a public company earns profit, it must decide how to distribute it. The Profit and Loss Appropriation Account shows this:

Particulars	Amount (₹)	Particulars	Amount (₹)
To Transfer to General Reserve	10,000	By Net Profit (from P&L A/c)	1,00,000
To Proposed Dividend	40,000	By Balance b/d (Retained Earnings)	20,000
To Corporate Dividend Tax (if applicable)	8,000
To Balance c/d (Surplus)	62,000
Total	1,20,000	Total	1,20,000

Interest on Capital = Capital \times Rate \times Time Example: If capital is ₹5,00,000 at 10% p.a. for 6 months: Interest = 5,00,000 \times 10/100 \times 6/12 = ₹25,000

Key Takeaways for Exams

Public company ≠ Private company – Public can invite public subscription; private cannot.
Share Capital Account is a credit balance – it represents owners' equity.
All application/allotment/call accounts are debited when money is due and credited when received.
Calls-in-Arrears is a deduction from paid-up capital (shown as a negative).
Dividend is an appropriation of profit, not an expense – it appears in the Appropriation Account, not the Profit & Loss Account.

Important

For a public company, the minimum number of directors is 3 (vs. 2 for private). Also, a public company must issue a prospectus when inviting the public to subscribe – this is a legal document with full financial disclosure.

Meaning of a Company

A company is an artificial person created by law, having a separate legal entity, perpetual succession, and a common seal. It is formed under the Companies Act for carrying on business with limited liability.

Characteristics of a Company

Characteristic	Explanation
Separate Legal Entity	The company is distinct from its members. It can own property, sue and be sued in its own name.
Limited Liability	Members' liability is limited to the unpaid amount on their shares (in a company limited by shares).
Perpetual Succession	Members may come and go, but the company continues to exist until wound up by law.
Common Seal	Acts as the official signature of the company (though now optional under the Companies Act, 2013).
Transferability of Shares	Shares of a public company are freely transferable; private companies have restrictions.
Capacity to Sue and Be Sued	The company can initiate legal proceedings and be sued in its corporate name.
Artificial Person	It exists only in the eyes of the law — it has no physical existence but can act through its Board of Directors.
Borrowing Powers	A company can raise funds by issuing shares, debentures, or taking loans.

✓Final answer

A company is an artificial person created by law with a separate legal entity, limited liability, perpetual succession, and a common seal, distinct from its members.

A company is a voluntary association of persons formed for carrying on some business with a view to earning profit, having a separate legal existence, perpetual succession, and a common seal. Its key characteristics include separate legal entity, limited liability, perpetual succession, transferability of shares, and a common seal.

What is meant by the word 'Company'?

In the context of business and commerce, the word 'Company' refers to an artificial person created by law, having a separate legal entity, perpetual succession, and a common seal. It is a voluntary association of persons who contribute money or money's worth to a common stock to carry on some business or undertaking, and who share the profit or loss arising therefrom.

The Companies Act, 2013 defines a company as "a company incorporated under this Act or under any previous company law." This legal definition emphasises that a company comes into existence only when it is registered under the law.

Characteristics of a Company

The following are the essential characteristics that distinguish a company from other forms of business organisation:

1. Separate Legal Entity

A company has an independent legal existence distinct from its members. It can own property, enter into contracts, sue and be sued in its own name. The company is not the agent of its shareholders, nor are the shareholders liable for the acts of the company. For example, if a shareholder dies, the company continues to exist unaffected.

2. Limited Liability

The liability of the members of a company is limited to the amount unpaid on their shares (in case of a company limited by shares) or to the amount they have guaranteed to contribute (in case of a company limited by guarantee). This means that if the company incurs debts beyond its assets, the personal assets of the shareholders cannot be touched to pay those debts.

3. Perpetual Succession

A company has continuous existence. It is created by law and can be dissolved only by law. Members may come and go, but the company continues to exist forever. The death, insolvency, or retirement of any member does not affect the existence of the company. As the saying goes, "Members may change but the company remains the same."

4. Transferability of Shares

The shares of a public company are freely transferable. A shareholder can sell or transfer his shares to any person without the consent of other members. This provides liquidity to the investment and makes it easy for investors to enter or exit the company. In a private company, however, there are restrictions on the transfer of shares.

5. Common Seal

Since a company is an artificial person and cannot sign documents physically, it uses a common seal as its official signature. Any document bearing the common seal and signed by authorised officers is binding on the company. The common seal is affixed only under the authority of the Board of Directors.

6. Capacity to Sue and Be Sued

A company can sue any person or another company in a court of law for the enforcement of its rights. Similarly, it can be sued by others for breach of contract or any other legal wrong. This is a direct consequence of its separate legal personality.

7. Voluntary Association

A company is a voluntary association of persons who come together with a common objective. No one can be forced to become a member of a company. The membership is open to anyone who agrees to the terms and conditions laid down in the Memorandum and Articles of Association.

8. Separation of Ownership and Management

In a company, the shareholders are the owners, but the management is vested in the Board of Directors elected by the shareholders. This separation allows for professional management and efficient operation of the business. The shareholders do not have the right to participate in the day-to-day management of the company.

9. Artificial Person

A company is an artificial person created by law. It has no physical existence, but it can act through its directors and officers. It can own property, incur debts, and enter into contracts, just like a natural person, but it cannot marry, vote, or hold public office.

10. Statutory Regulation

A company is governed by the provisions of the Companies Act, 2013 (or the relevant company law in force). It must comply with various statutory requirements regarding registration, filing of returns, maintenance of books of accounts, audit, and meetings. This ensures transparency and accountability.

Watch out

A common mistake is to think that a company is the same as a partnership firm. Remember: a partnership has no separate legal entity, partners have unlimited liability, and the firm dissolves on the death of a partner. A company has none of these features.

Tip

To remember the characteristics easily, use the mnemonic SLPTCS — Separate Legal Entity, Limited Liability, Perpetual Succession, Transferability of Shares, Common Seal, and Statutory Regulation.

✓Final answer

A company is an artificial person created by law, having a separate legal entity, perpetual succession, limited liability, transferable shares, and a common seal. Its key characteristics include separate legal entity, limited liability, perpetual succession, transferability of shares, common seal, capacity to sue and be sued, voluntary association, separation of ownership and management, artificial person status, and statutory regulation.

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Q.What is meant by the word 'Company'? Describe its characteristics.

What is meant by the word 'Company'?

Characteristics of a Company

1. Separate Legal Entity

2. Limited Liability

3. Perpetual Succession

4. Transferability of Shares

5. Common Seal

6. Capacity to Sue and Be Sued

7. Voluntary Association

8. Separation of Ownership and Management

9. Artificial Person

10. Statutory Regulation

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