Accounting: Company an Introduction: Characteristics and Types of Companies

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  • Sole proprietorship and partnership firms dealt with less capital investments. They may not meet the growing needs of huge capital and skilled managerial personnel. Also, the life of those firms is limited and liability on proprietor or partners is unlimited. To overcome these problems a new form of business organization known as Company came into existence.

  • As per Companies Act 1956, a company is formed and registered under the Companies Act or an existing company registered under any other Act”.

  • In simple words company is a voluntary association of individuals formed to carry on business to earn profits or for non-profit purposes. By purchasing shares of the company, one could become owner of the company.

Characteristics of a Company

  • Artificial legal person: Company is created by the law, but it has almost all rights as like human being. So, it is called as artificial legal person. A company can enter into any contract as like human beings do. A company can own property, bank accounts etc. but it won’t go to jail, marry, take an oath or practice any learned profession. It can sue in its own name and can be sued.

  • Incorporated Body: Company should be registered with Registrar of Companies as per Companies Act. It has its own identity. Although the capital is contributed by its members called shareholders, yet the property purchased out of the capital belongs to the company and not to its shareholders.

  • Transferability of shares: The shares of the company are easily transferable. The shares can be bought and sold in the stock market.

  • Perpetual Existence: Company does not have death like human being. It will be unaffected by the death or insolvency of its members.

  • Limited Liability: Generally, members of the company have limited liability.

    • Liability is limited to the extent of face value of shares held by them. The shareholders cannot be asked to pay more than the unpaid value of their shares.

    • Liability is limited to the extent of amount guaranteed by them. Further, this liability arises only when the company goes into liquidation.

    • Liability is unlimited is a rare condition.

  • Representative Management: Unlike proprietorship and partnership company involves huge number of owners i.e. shareholders. It is difficult to manage the company by huge number of shareholders. Instead of them Board of Directors who are elected by shareholders will manage companies’ activities.

  • Company Seal: It is the official signature of the company. Any document bearing the common seal of the company is legally binding on the company.

Note: The Companies (Amendment) Act, 2015 has made the Common Seal optional. Section 9 of the Act does not have the phrase ‘and a common seal’ in it. This provides an alternative mode of authorization for companies who do not wish to have a common seal.

According to this amendment, if a company does not have a common seal, then the authorization shall be done by:

  • Two Directors or

  • One Director and the Company Secretary (if the company has appointed a Company Secretary).

Types of Companies

Image of Classification of Companies

Image of Classification of Companies

On the Basis of Formation

  • Statutory Company: A company which is formed by a Special Act of parliament or state legislature is called a Statutory Company.

Ex: Reserve Bank of India, Industrial Financial Corporation of India, Life Insurance Corporation of India etc.

  • Registered Company: A company formed and registered under the Companies Act, 1956 or Companies Act 2013 or earlier is called a Registered Company. Those companies will be regulated as per Companies Act.

Ex: Tata Motors, Reliance Industries Ltd.

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