What is a Company?

A company is a legal entity formed by a group of individuals to engage in business or trade

with the intention of earning profits or achieving specific objectives. Companies exist as
separate legal entities, meaning they are distinct from the people who own or manage them.
The concept of a company plays a crucial role in modern commerce, offering a framework
for businesses to operate, grow, and ensure legal compliance. This article explores the
meaning of a company, its essential characteristics, and the different types of companies
recognized under Indian law, particularly the Companies Act 2013.
Definition of a Company

According to Section 2(20) of the Companies Act, 2013, "A company means a company
incorporated under this Act or under any previous company law."
Prof. Haney: “A company is an artificial person created by law, having a separate legal
entity with perpetual succession and a common seal.”

CHARACTERISTICS OF A COMPANY

The definition of a company in law carries several distinct characteristics that differentiate it
from other business forms like sole proprietorships or partnerships. Here are the primary legal
characteristics of a company:
Artificial Legal Person

A company is a legal entity created by law. It has all the rights and responsibilities of a
natural person, such as entering into contracts, owning assets, and suing or being sued.
However, it cannot physically act; it operates through its Board of Directors.
Separate Legal Entity

A company has a distinct legal identity from its members. This ensures that the company’s
assets and liabilities are separate from those of its shareholders. The principle of separate
legal personality was affirmed in the Salomon case, protecting shareholders from personal
liability for the company’s debts.
Limited Liability

The liability of a company’s shareholders is limited to the unpaid value of their shares. This
ensures that the personal assets of shareholders are protected, even if the company faces
financial difficulties.
Perpetual Succession

The company’s existence is not affected by the death, insolvency, or retirement of its
members. It continues to exist until it is legally dissolved through winding-up procedures.
Transferability of Shares

In a public company, shares can be freely transferred, providing liquidity to investors.

However, private companies may impose restrictions on share transfers through their Articles
of Association.
Common Seal (Optional)

Though optional under the Companies Act 2013, many companies use a common seal as their
official signature for validating documents.
Representative Management

The shareholders elect a Board of Directors to manage the company’s affairs. This ensures
professional and efficient management, as the day-to-day operations are overseen by
directors.
Voluntary Association for Profit

A company is formed voluntarily by individuals or entities with the intention of conducting

business for profit. Profits are shared among shareholders as dividends.

WHY FORM A COMPANY? BENEFITS OF INCORPORATION

Forming a company provides several advantages for businesses, including:

 Limited Liability Protection: Protects the personal assets of shareholders.

 Separate Legal Identity: Allows companies to operate independently from their
owners.
 Perpetual Succession: Ensures continuity, even if ownership changes.
 Ease of Raising Capital: Companies can raise funds through share issuance.
 Tax Benefits: Some companies enjoy lower tax rates and other incentives.

FORMATION OF A COMPANY
The formation of a company goes through a number of steps, starting from idea generation to
commencing of the business. This whole process can be broken down into 4 major phases or
steps, which we will be discussing in the lines below.

The major steps in formation of a company are as follows:

 1. Promotion stage

2. Registration stage

3. Incorporation stage

4. Commencement of Business stage

Let us discuss these steps in detail.

Promotion Stage: Promotion is the first step in the formation of a company. In this phase,
the idea of starting a business is converted into reality with the help of promoters of the
business idea.

In this stage the ideas are executed. The promotion stage consists of the following steps:

1. Identify the business opportunity and decide on the type of business that needs to be
done.

2. Perform a feasibility study and determine the economic, technical and legal aspect of
executing the business.

3. Interest shown by promoters towards the business idea and supply of capital and other
necessary procedures to start the business.

Registration stage: Registration stage is the second part of the formation process. In this
stage, the company gets registered, which brings the company into existence.

A company is said to be in existence, if it is registered as per the Companies Act, 2013. In

order to get a company registered, some documents need to be provided to the Registrar of
Companies.

There are several steps involved in the registration phase, and are as follows:

1. Memorandum of Association: A memorandum of association (MoA) must be signed

by the founders of the company. A minimum of 7 members are required in case of a
public company and 2 in case of a private company. The MoA must be properly
registered and stamped.

2. Article of Association: Article of Association (AoA) is also required to be signed and

submitted. All members who previously signed MoA, should also be signing the
AoA.
 3. The next step is preparing a list of directors which should be filed with the Registrar
of Companies.

4. Directors of the company should provide a written consent agreeing to be directors,

should be filed with the Registrar of Companies (RoC).

5. The notice of address of the office needs to be filed.

6. A statutory declaration should be made by any advocate of either the High Court or
Supreme Court, or a person of the capacity of Director, Secretary or Managing
Director. This declaration shall be filed with the RoC.

Certificate of Incorporation: Certificate of incorporation is issued when the registrar is

satisfied with the documents provided. This certificate validates the establishment of the
company in the records.

Certificate of commencement of business: Certificate of commencement of business is

required for a public company to start doing business, while a private company can start
business once it has received the certificate of incorporation.

Public companies receiving the certificate of incorporation can issue prospectus in order to
make the public subscribe to the share for raising capital. Once all the minimum number of
required shares have been subscribed, a letter should be sent to the registrar along with a bank
document stating the receiving of the money.

The registrar will issue a certificate upon finding the provided documents satisfactory. This
certificate is known as certificate of commencement of business. The company can start
business activities from the date of issue of the certificate and the business shall be done as
per rules laid down in the MoA (Memorandum of Association).

WHAT IS THE MINISTRY OF COMPANY AFFAIRS?

The Ministry is primarily concerned with administration of the Companies Act 2013, the
Companies Act 1956, the Limited Liability Partnership Act, 2008 & other allied Acts and
rules & regulations framed there-under mainly for regulating the functioning of the corporate
sector in accordance with law.
Companies on the Basis of Liabilities

When we look at the liabilities of members, companies can be limited by shares, limited by
guarantee or simply unlimited.

a) Companies Limited by Shares

Sometimes, shareholders of some companies might not pay the entire value of their shares in
one go. In these companies, the liabilities of members is limited to the extent of the amount not
paid by them on their shares.

This means that in case of winding up, members will be liable only until they pay the remaining
amount of their shares.

b) Companies Limited by Guarantee

In some companies, the memorandum of association mentions amounts of money that some
members guarantee to pay.

In case of winding up, they will be liable only to pay only the amount so guaranteed. The
company or its creditors cannot compel them to pay any more money.

c) Unlimited Companies
Unlimited companies have no limits on their members’ liabilities. Hence, the company can use
all personal assets of shareholders to meet its debts while winding up. Their liabilities will
extend to the company’s entire debt.

Companies on the basis of members

a) One Person Companies (OPC)

These kinds of companies have only one member as their sole shareholder. They are separate
from sole proprietorships because OPCs are legal entities distinct from their sole members.
Unlike other companies, OPCs don’t need to have any minimum share capital.

b) Private Companies

Private companies are those whose articles of association restrict free transferability of shares. In
terms of members, private companies need to have a minimum of 2 and a maximum of 200.
These members include present and former employees who also hold shares.

c) Public Companies

In contrast to private companies, public companies allow their members to freely transfer their
shares to others. Secondly, they need to have a minimum of 7 members, but the maximum
number of members they can have is unlimited.

Companies on the basis of Control or Holding

In terms of control, there are two types of companies.

a) Holding and Subsidiary Companies

In some cases, a company’s shares might be held fully or partly by another company. Here, the
company owning these shares becomes the holding or parent company. Likewise, the company
whose shares the parent company owns becomes its subsidiary company.
Holding companies exercise control over their subsidiaries by dictating the composition of their
board of directors. Furthermore, parent companies also exercise control by owning more than
50% of their subsidiary companies’ shares.

b) Associate Companies

Associate companies are those in which other companies have significant influence. This
“significant influence” amounts to ownership of at least 20% shares of the associate company.

The other company’s control can exist in terms of the associate company’s business decisions
under an agreement. Associate companies can also exist under joint venture agreements.

Companies in terms of Access to Capital

When we consider the access a company has to capital, companies may be either listed or
unlisted.

Listed companies have their securities listed on stock exchanges. This means people can freely
buy their securities. Hence, only public companies can be listed, and not private companies.

Unlisted companies, on the other hand, do not list their securities on stock exchanges. Both,
public, as well as private companies, can come under this category.

Other Types of Companies

a) Government Companies

Government companies are those in which more than 50% of share capital is held by either the
central government, or by one or more state government, or jointly by the central government
and one or more state government.

b) Foreign Companies
Foreign companies are incorporated outside India. They also conduct business in India using a
place of business either by themselves or with some other company.

c) Charitable Companies (Section 8)

Certain companies have charitable purposes as their objectives. These companies are called
Section 8 companies because they are registered under Section 8 of Companies Act, 2013.

Charitable companies have the promotion of arts, science, culture, religion, education, sports,
trade, commerce, etc. as their objectives. Since they do not earn profits, they also do not pay any
dividend to their members.

d) Dormant Companies

These companies are generally formed for future projects. They do not have significant
accounting transactions and do not have to carry out all compliances of regular companies.

e) Nidhi Companies

A Nidhi company functions to promote the habits of thrift and saving amongst its members. It
receives deposits from members and uses them for their own benefits.

f) Public Financial Institutions

Life Insurance Corporation, Unit Trust of India and other such companies are treated as public
financial institutions. They are essentially government companies that conduct functions of
public financing.

ARTICLES OF ASSOCIATION (AOA) OF A COMPANY

The Articles of Association (AOA) of the company contains its rules or bye-laws and
regulations that control or govern the conduct of its business and manage its internal affairs.
The AOA is subordinate to the MOA of a company and is governed by the MOA. Every
company must have an AOA as it plays a vital role in defining its internal rights, workings,
management and duties. The contents of AOA should be in sync with the MoA and the
Companies Act, 2013.

Contents of AOA

 Details regarding the share capital

 Details of director’s qualification, appointment, powers, remuneration, duties

etc.

 Rules regarding company dividends and reserves

 Details regarding company accounts and audit

 Provisions relating to the company’s borrowing powers

 Provisions relating to conducting meetings

 Process of winding up of the company

What is MoA?

A Memorandum of Association (MoA) represents the charter of the company. It is a legal

document prepared during a company's formation and registration process. It defines the
company's relationship with shareholders and specifies the objectives for which the
company has been formed. The company can undertake only those activities mentioned in the
Memorandum of Association.

What are Main Clauses of the Memorandum of Association?

The following are the 5 clauses of Memorandum of Association:

 Name Clause

 Registered Office Clause

 Object Clause

 Liability Clause

 Capital Clause

Contents of Memorandum of Association

The memorandum of association clauses/contents are as follows:

1. Name Clause:

This clause specifies the name of the company. The name of the company should not be
identical to any existing company. Also, if it is a private company, then it should have the
word ‘Private Limited’ at the end. In the case of a public company, then it should add the
word “Limited” at the end of its name. For example, ABC Private Limited in the case of the
private, and ABC Ltd for a public company. The name should be in compliance with the
provisions laid down in the Companies Act and Rules.

2. Registered Office Clause:

This clause specifies the name of the State in which the registered office of the company is
situated. It helps to determine the jurisdiction of the Registrar of Companies. The company
must inform the registered office location and address to the Registrar of Companies within
30 days from the date of incorporation or commencement of the company. The registered
office is the official office of the company. All communications, legal notices and documents
will be sent to the registered office address.

3. Object Clause:

This clause states the objective with which the company is formed. The company must carry
out its business activities to fulfill the objectives mentioned in this clause. It helps to protect
the interests of the stakeholders since the company must operate within the scope of its object
clause and should not engage in any activities not specified in this clause. The objectives can
be further divided into the following 3 subcategories:

 Main Objective: It states the main business of the company

 Incidental Objective: These are the objects ancillary to the attainment of main
objects of the company

 Other objectives: Any other objects which the company may pursue and are not
covered in above (a) and (b)

4. Liability Clause:

It states the nature of liability of the members of the company in case of any loss or debts
incurred by it. In the case of an unlimited company, the liability of the members is unlimited.
Whereas, in the case of a company limited by shares, the liability of the members is restricted
by the amount unpaid on their share. For a company limited by guarantee, the liability of the
members is restricted by the amount each member has agreed to contribute.

5. Capital Clause:

This clause details the maximum capital a company can raise, also called the
authorized/nominal capital of the company. It provides the maximum amount of capital that
can be issued to the company shareholders. It also explains the division of such capital
amount into the number of shares of a fixed amount each. It should also specify the type of
shares the company is authorised to issue, i.e. equity shares, preference shares, or
debentures.

DIFFERENCE BETWEEN MOA AND AOA

Particulars MOA AOA

Defines rules and regulations of

Defines the company’s constitution, the company. It also defines the
Description powers, objectives, and constraints of the duties, powers, liabilities and
organisation. rights of individuals associated
with the organisation.

It contains the provisions as per

Contents It contains the five mandatory clauses. the requirements of the
organisation.

It defines the relationship

Area of It defines the relationship between the between the company and its
operation company and third parties. members and also amongst
members.

The drafting of AOA is

Filing at the It is a mandatory document that must be
mandatory. However, the filing of
time of filed with the ROC at the time of
AOA with the ROC is optional at
registration company registration.
the time of company registration.
 Importance and MOA is a supreme legal document and AOA is subordinate to the MoA
position subordinate to the Companies Act. and the Companies Act.

Any provision in the AOA that

The relationship MOA is a dominant document that helps
contradicts the MoA is considered
between the two in the drafting of the AoA.
as null and void.

The acts done beyond the scope

Acts done The acts done beyond the scope of MOA
of AOA can be ratified by
beyond its scope are void and cannot be ratified.
shareholders.

An alteration can be made in the MOA

An alteration in the AOA can be
only after passing a special resolution in
made by passing a special
Alteration the Annual General Meeting (AGM) and
resolution in the Annual General
after obtaining prior approval from the
Meeting (AGM).
Central Government.

Retrospective The MOA cannot be amended with The AOA can be amended
amendment retrospective effect. retrospectively.

RIGHTS AND LIABILITIES OF MEMBERS

Definition and Types of Members:

Definition of Members: A member refers to an individual or entity that has joined a

company and holds certain rights and obligations.
Types of Members: Different types of members include shareholders, partners, subscribers,
directors, and designated partners, depending on the type of company and its legal structure.
II. Rights of Members:

Voting Rights: Members typically have the right to vote on matters of importance within the
company, such as electing directors, approving company policies, and major business
decisions.
Dividend Rights: Shareholders, in particular, have the right to receive dividends if the
company generates profits and declares dividends.
Right to Information: Members have the right to access company information, including
financial statements, annual reports, and other relevant documents.
Right to Transfer Shares: Depending on the company’s constitution, members may have
the right to transfer their shares to others, subject to certain restrictions and compliance with
legal provisions.
Right to Participate in Meetings: Members can attend and participate in general meetings,
annual general meetings, and extraordinary general meetings to express their views and
contribute to decision-making processes.

III. Liabilities of Members:

Liability for Shareholders: Shareholders generally have limited liability, meaning their
personal assets are not at risk beyond the value of their investment in the company.
Liability for Partners: In a partnership, partners may have unlimited liability, meaning their
personal assets can be used to settle the company’s debts.
Fiduciary Duties: Members, particularly directors, owe fiduciary duties to the company and
its shareholders, requiring them to act in good faith, exercise due care, and prioritize the
company’s interests.
Liability for Misconduct: Members can be held personally liable if they engage in
fraudulent activities, misrepresentation, or any illegal actions that cause harm to the company
or its stakeholders.
Liability for Unpaid Contributions: Members may have an obligation to contribute capital
or resources to the company as agreed upon during the formation or subsequent fundraising
activities. Failure to fulfill these obligations can result in liability.

IV. Additional Rights of Members:

Right to Inspect Books and Records: Members often have the right to inspect the
company’s books, records, and accounts to ensure transparency and accountability.
Pre-emption Rights: Shareholders may have pre-emption rights, which allow them to
maintain their proportional ownership by having the first opportunity to purchase newly
issued shares.
Right to Remove Directors: Members, especially shareholders, may have the right to
remove directors from their positions if they believe their actions are detrimental to the
company’s interests.

V. Additional Liabilities of Members:

Liability for Unlawful Distributions: Members, particularly directors and officers, can be
held personally liable if they authorize unlawful distributions of company assets, such as
paying dividends when the company is insolvent or unable to meet its obligations.
Liability for Breach of Duty: Members who breach their duties, such as confidentiality,
loyalty, or non-compete agreements, may face legal consequences and be held accountable
for any damages caused to the company.
Joint and Several Liability: In certain circumstances, members may have joint and several
liability, meaning they can be individually or collectively responsible for the company’s
debts and obligations. This often applies to partnerships or situations where members have
provided personal guarantees.