Q.What do you mean by separate legal entity of a company?
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🔒 Start your 14-day free trial to unlock the full solution →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
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:
| Date | 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:
| Date | 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:
| Date | 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:
| Date | 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) |
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 |
A company formed under the Companies Act has an identity in the eyes of law that is separate from the people who own it. This is the feature of separate legal entity. …
Separate legal entity means a company is a legal person distinct from its members.
A company incorporated under the Companies Act is regarded by law as an artificial person having an existence separate and distinct from its members (shareholders). Because of this separate legal entity:
- the company can own assets and property in its own name,
- it can enter into contracts in its own name,
- it can sue others and be sued in its own name, and
- the members are not personally the owners of the company's property, nor is the company bound by the members' personal acts. …
Showing the 12 most recent of 33 on this concept.
- CBSE 2026Set ANNUAL1 markMCQQ.Consider the following statements: a. The maximum paid-up capital for a one person company can be ₹ 2 crores. b. Sweat equity share can be issued at discount. c. The average annual turnover of a one person company can be below ₹ 2 crores. Choose the correct answer from the following options. A) Only c B) a, b, c C) Both b and c D) Only a
›Reveal solutionSolution
Statements b and c are correct while a is wrong, so option (C) is the answer.
Examining each statement against the Companies Act, 2013 framework an RBSE/CBSE Class-12 student studies:
- (a) 'Maximum paid-up capital of an OPC can be ₹2 crore' - WRONG. The relevant paid-up capital threshold linked to an OPC was ₹50 lakh; ₹2 crore relates to TURNOVER, not capital. …
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: ________ company does not require to issue prospectus.
›Reveal solutionSolution
Answer: Private company.
A prospectus is a document inviting the public to subscribe to a company's shares/debentures. A private company is prohibited from inviting the public and raises capital privately, so it does not need to issue a prospectus. (A public company rai …
- CBSE 2026Set ANNUAL1 markQ.Answer in one word/sentence: A public company must use which word at the end of its name?
›Reveal solutionSolution
Answer: Limited (Ltd.).
Under the Companies Act, 2013, a public limited company must add the word 'Limited' at the end of its name (a private company uses 'Private Limited'). …
- CBSE 2026Set ANNUAL1 markQ.What is meant by public issue of shares?
›Reveal solutionSolution
Public issue of shares means offering shares for subscription to the general public at large, through a prospectus.
When a company (usually a public company) needs to raise capital, it may invite applications for its shares from the general public — any member of the public, not just a specific pre-selected group of investors or existing shareholders. This is done by issuing a prospectus, a formal document inviting the public to apply for and subscribe to the company's shares/debentures, disclosing all material information about the company so prospective investors can make an informed decision. This is distin …
- CBSE 2025Set ANNUAL1 markMCQQ.A company is incorporated by (A) A Special Act of Parliament (B) Companies Act (C) Agreement of investors (D) Both (A) and (B)
›Reveal solutionSolution
A company is incorporated by registration under the Companies Act, so the answer is (B).
Incorporation means the legal process of forming a company so that it becomes a separate legal person. An ordinary (registered) company is incorporated under the Companies Act (in India, the Companies Act, 2013).
- A Special Act of Parliament (A) creates only statutory corporations (like certain public-sector bodies), not companies in general. …
- CBSE 2025Set ANNUAL1 markMCQQ.The liability of members in a company is (A) Limited (B) Unlimited (C) Stable (D) Fluctuating
›Reveal solutionSolution
The liability of members in a company (limited by shares) is limited, so the answer is (A).
A key feature of a company is limited liability. In a company limited by shares, a member is liable to pay only the amount remaining unpaid on the shares held — once the shares are fully paid, there is no further liability.
- This protects shareholders' personal assets, unlike a partnership where liability is unlimited (B). …
- CBSE 2025Set ANNUAL1 markMCQQ.A company signs through (A) Seal (B) Stamp (C) Both (A) and (B) (D) None of these
›Reveal solutionSolution
A company signs/executes documents through its common seal, so the answer is (A).
A company is an artificial person created by law; it has no natural body or hand of its own. Therefore it authenticates its important documents by affixing its common seal, which acts as the official signature of the company.
- A mere Stamp (B) is not the company's legal signature. …
- CBSE 2025Set ANNUAL1 markMCQQ.The minimum number of members in a public company is (A) 2 (B) 5 (C) 7 (D) 10.
›Reveal solutionSolution
A public company must have at least 7 members — option (C).
Under the Companies Act, 2013, the minimum number of members (shareholders) required to incorporate a public company is 7 (with no maximum limit). By contrast, a private company requires a minimum of 2 members, and a One Person Compa …
- CBSE 2025Set ANNUAL1 markMCQQ.Which one of the following is not a feature of a joint stock company? (A) Limited liability (B) Common seal (C) Perpetual existence (D) Separate entity.
›Reveal solutionSolution
Common seal is no longer an essential feature of a company — option (B).
A joint stock company has several well-settled features: it is a separate legal entity distinct from its members, its members enjoy limited liability, and it has perpetual existence (succession) unaffected by the death or exit of members. The common seal was traditionally regarded as the company's official signature, but the Companies (Amendment) Act, 2015 made having a common se …
- CBSE 2025Set ANNUAL1 markQ.What do you mean by separate legal entity of a company?
›Reveal solutionSolution
Separate legal entity means a company is a legal person distinct from its members.
A company incorporated under the Companies Act is regarded by law as an artificial person having an existence separate and distinct from its members (shareholders). Because of this separate legal entity:
- the company can own assets and property in its own name,
- it can enter into contracts in its own name,
- it can sue others and be sued in its own name, and
- the members are not personally the owners of the company's property, nor is the company bound by the members' personal acts. …
- CBSE 2025Set ANNUAL1 markMCQQ.A company has(a) Separate legal entity(b) Perpetual entity(c) Limited liability(d) All of these
›Reveal solutionSolution
A company has all the listed features - option (d).
A company, being a body corporate created by law, has a separate legal entity (distinct from its members), perpetual succession/existence (unaffected by changes in membership), and limited liability of members (limited to the unpai …
- CBSE 2025Set ANNUAL1 markQ.Fill in the blank: Company is an ________ person created by Law.
›Reveal solutionSolution
Answer: Artificial.
A company is created by a process of law (incorporation) and exists only in the eyes of law. It has no physical body but can own property, enter contracts and sue or be sued in its own n …
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