BAM 101

ADDITIONAL
PROJECT
“COMPANY”
SUBMITTED TO: SUBMITTED BY:
DR. SANIL KUMAR DEEPTI YADAV
B.COM. (1 YR)
St

Sec. a
 Index
(1) DEFINITION
(2) FEATURES
(3) MERITS
(4) DEMERITS
(5) TYPES OF COMPANY
(6) FORMATION OF
COMPANY
(7) DISSOLUTION OF
COMPANY
(8) CONCLUSION
DEFINITION

A company can be defined as an "artificial person",

invisible, intangible, created by or under law, with a
discrete legal personality, perpetual succession, and a
common seal. It is not affected by the death, insanity,
or insolvency of an individual member.
According to Haney, “Joint Stock Company is a
voluntary association of individuals for profit, having
a capital divided into transferable shares. The
ownership of which is the condition of membership”.
From the above definitions, it can be concluded that a
company is registered association which is an artificial
legal person, having an independent legal, entity with
a perpetual succession, a common seal for its
signatures, a common capital comprised of
transferable shares and carrying limited liability.

FEATURES

(1) Separate Legal Entity

A company is a separate legal entity from its members who
constitute it. It can hold, purchase and sell properties and
enter into contracts in its own name. It is an artificial legal
person who can sue aid be sued. Companies are owned by
shareholders and they elect the Board of Directors, who run
the company. The board in turn selects the management.
Thus the shareholders exercise only indirect control over the
affairs of the company. The separation of ownership from
the management some-times results in a conflict of interests
between owners and management. The best the
shareholders can do is to change some of the directors
through vote in the annual general meeting subsequent to
any such conflict.
(2) Limited Liability
The liability of the shareholders of a company is limited to
the nominal value of the shares held by them. In the event
of liquidation the maximum loss of a shareholder is equal to
the nominal value of the shares held by him. The creditors
have no claim on the personal assets of the shareholders in
the event of liquidation.
(3) Transferability of Shares
The shares of a joint stock company are freely transferable.
It does not require any permission from the company or
consent of other shareholders. The shares of listed
companies can be sold or purchased on the stock exchange
and ownership transferred without any difficulty. However,
in case of a private limited company, the transfer of shares is
subject to the restrictions given in the company's articles.
(4) Ability to Acquire a Broad Capital Base
Following are significant factors that enable a company to
raise large amount of capital:
The nominal value of shares is kept small, as a result of
which investment of any size is possible.
 Limited liability minimize the risk of the investors and makes
investment attractive and safer.
(5) An Artificial Person created by Law
A company is called an artificial person because it does not
take birth like a natural person but it comes into existence
through the law. The company possess only those
properties which are conferred upon it by its Memorandum
of Association (Charter).
(6) Continuous Existence
The companies generally have a continuous existence
irrespective of changes in ownership. In the cases of sole
proprietorship and partnership, change in ownership means
the dissolution of the original business and formation of a
new business.
(7) Common Seal
Being an artificial person, a company can act through
natural persons only. The acts of a company are authorized
by the "common seal". The "common seal" is the official
signature of the company. A document not bearing the
common seal is not binding on the company.

MERITS
1. Accumulation of Large Resources
The main drawback of the sole trade and partnership
concerns has been the scarcity of resources. The resources
of a sole trader and of partners being limited, these
enterprises have always suffered for want of funds. A
company can collect large sum of money from large
number of shareholders. There is no limit on the number of
shareholders in a public company. If need for more funds
arises, the number of shareholders can be increased. Joint
stock companies are suitable for those businesses where
large resources are required.
2. Limited Liability
The liability of members in a company form of organisation
is limited to the nominal value of the shares they have
acquired. If a person has purchased a share of Rs. 100, his
liability is limited to Rs. 100 only. If the share is partly paid,
then he can be required to pay only the unpaid value of the
share. In no case the total payment will exceed Rs. 100. The
limited liability encourages many persons to invest in shares
of joint stock companies. Many persons will be reluctant to
invest in those enterprises where liability is unlimited.
3. Continuity of Existence
When a company is incorporated, it becomes a separate
legal entity. It is an entity with perpetual succession. The
members of a company may go on changing from time to
time but that does not affect the continuity of a company.
The death or insolvency of members does not in any way
affect the corporate existence of the company. The
continuity of a company is not only in the interests of the
members but is also beneficial for the society. The
discontinuation of a company may cause wastage of
resources and inconvenience to the consumers.
4. Efficient Management
In company form of organisation, ownership is separate
from management. It enables the company to appoint
expert and qualified persons for managing various business
functions. The availability of large-scale resources enables
the company to attract talented persons by offering them
higher salaries and better career opportunities. The efficient
management will help the company to expand and diversify
its activities.
5. Economies of Large Scale Production
With the availability of large resources, the company can
organise production on a big scale. The increase in scale
and size of the business will result in economies in
production, purchase, marketing and management, etc.
These economies will enable the company to produce
goods at a lower cost, thus resulting in more profits. The
company will help consumers by providing them with
cheaper goods and will also be able to accumulate more
resources for further expansion.
6. Transferability of Shares
The shares of a public company are freely transferable. A
shareholder can dispose of his shares at any time when the
market conditions are favourable or he is in need of money.
The company does not return share-money before its
winding up but shareholders can easily sell their shares
through stock exchange markets.
Stock Exchange provides a ready market for the purchase
and sale of shares. The facility of transferring shares
encourages many persons to invest. This provides liquidity
to the investor and stability to the company. On the other
hand, partnership form of organisation does not provide
free transferability of shares.
7. Ability to Cope with Changing Business Environments
The present business enterprises operate under uncertain
economic and technological environments. Technological
changes are taking place every day. The needs of consumers
are varied and changing, to cope with the changing
economic environment every business is required to invest
money on research and developmental programmes. Sole
trade concern or partnership firms cannot afford to spend
money on research work. Joint stock companies can afford
to invest money on research projects. It will enable them to
cope with changing business conditions.
8. Diffused Risk
In sole trade and in partnership business, the risk is shared
by a small number of persons. Further uncertainties
discourage them from taking up new ventures for fear of
risk. In company form of organisation, the number of
contributories is large; so risk is shared by a large number of
persons. The burden to be shared by different individuals
becomes insignificant. It enables companies to take up new
ventures.
9. Democratic Set-up
The values of shares are generally small. It enables persons
with low incomes to purchase the shares of companies.
Shareholders come from all walks of life. Every individual has
an opportunity to become a shareholder. Secondly, the
Board of Directors is elected by the members. So members
have a say in deciding the policies of the company. The
company form of organisation is democratic both from
ownership and management side.
10. Social Benefits
The company form of organisation mobilises scattered
savings of the community. These savings can be better used
for productive purposes. The companies also enable
financial institutions to invest their money by providing them
avenues. It also enables the utilisation of natural resources
for better productive uses. Large-scale production enjoys a
number of economies enabling low cost of production. The
society is supplied with enough quantity of goods.
DEMERITS
1. Difficulty of Formation
Promotion of a company is not an easy task. A number of
stages are involved in company promotion. The suitability of
a particular type of business is to be decided first. A number
of persons should be ready to associate for getting a
company incorporated. A lot of legal formalities are required
to be performed at the time of registration. The shares will
have to be sold during the particular time. Promotion of a
company is both expensive and risky.
2. Separation of Ownership and Management
The ownership and management of public company is in
different hands. The owners i.e., shareholders play an
insignificant role in the working of the company. On the
other hand, control is in the hands of those who have no
stakes in the company. The management may indulge in
speculative business activities. There is no direct relationship
between efforts and rewards. The profits of the company
belong to shareholders and the Board of Directors are paid
only a commission. The management does not take
personal interest in the working of the company as is the
case in partnership and sole-trade business.
3. Evils of Factory System
The company form of organisation leads to large-scale
production. The evils of factory system like insanitation, air
pollution, congestion of cities are attributed to joint stock
companies. Joint stock companies facilitate formation of
business combinations which ultimately leads to the
monopolistic control and exploitation of consumers.
4. Speculation in Shares
The joint stock companies facilitate speculation in the shares
at stock exchanges. The prices of shares depend upon both
economic and non-economic factors. The speculators try to
fluctuate the prices of shares according to their suitability.
The stock exchanges will not help the growth of healthy
investment when speculative activities are being carried on.
The management of joint stock companies also sometimes
encourage speculation in shares for their personal gains.
5. Fraudulent Management
The promoters and directors may indulge in fraudulent
practices. The management is in the hands of those persons
who have not invested much in the company. The Company
Law has devised methods to check fraudulent practices but
they have not proved enough to check them completely.
6. Lack of Secrecy
The management of companies remains in the hands of
many persons. Everything is discussed in the meetings of
Board of Directors. The trade secrets cannot be maintained.
In case of sole trade and partnership concerns such secrecy
is possible because a few persons are involved in
management.
7. Delay in Decision-making
In company form of organization no single individual can
make a policy decision. All important decisions are taken
either by the Board of Directors or are referred to general
house. Decision-taking process is time consuming. If some
business opportunity arises and a quick decision is needed,
it will not be possible to arrange meetings all of a sudden.
So many opportunities may be lost because of a delay in
decision-making.
8. Concentration of Economic Power
The company form of organization has helped
concentration of economic power in a few hands. Some
persons become directors in a number of companies and try
to formulate policies which promote their own interests. The
shares of a number of companies are purchased to create
subsidiary companies. Interlocking of direction-ship and
establishment of subsidiary companies have facilitated
concentration of economic power in the hands of a few
business houses.
9. Excessive State Regulations
A large number of rules and regulations are framed for the
working of the companies. The companies will have to
follow rules even for their internal working. The government
tries to regulate the working of the companies because
large public money is involved. The formalities are many and
the penalties for their non-compliance are heavy. This often
detracts companies from their main objectives for which
they have been formed.

TYPES OF COMPANY
(A) On the basis of incorporation
(i) Chartered companies:
The crown in exercise of the royal prerogative has power to
create a corporation by the grant of a charter to persons
assenting to be incorporated. Such companies or
corporations are known as chartered companies. Examples
of this type of companies are Bank of England (1694), East
India Company (1600). The powers and the nature of
business of a chartered company are defined by the charter
which incorporates it. After the country attained
independence, these types of companies do not exist in
India.
(ii) Statutory companies:
A company may be incorporated by means of a special Act
of the Parliament or any state legislature. Such companies
are called statutory companies, Instances of statutory
companies in India are Reserve Bank of India, the Life
Insurance Corporation of India, the Food Corporation of
India etc. The provisions of the Companies Act 1956 apply to
statutory companies except where the said provisions are
inconsistent with the provisions of the Act creating them.
Statutory companies are mostly invested with compulsory
powers.
(iii) Registered companies:
Companies registered under the Companies Act 1956, or
earlier Companies Acts are called registered companies.
Such companies come into existence when they are
registered under the Companies Act and a certificate of
incorporation is granted to them by the Registrar.

(B) On the basis of liability

(i) Companies limited by shares:
When the liability of the members of a company is limited to
the amount if any unpaid on the shares, such a company is
known as a company limited by shares. In a company
limited by shares the liability of the members is limited to
the amount if any unpaid on the shares respectively held by
them. The liability can be enforced during existence of the
company as well as during the winding up. Where the
shares are fully paid up, no further liability rests on them.
(ii) Companies limited by guarantee:
It is a registered company in which the liability of members
is limited to such amounts as they may respectively
undertake by the memorandum to contribute to the assets
of the company in the event of its being wound up. In the
case of such companies the liability of its members is limited
to the amount of guarantee undertaken by them. Clubs,
trade associations, research associations and societies for
promoting various objects are various examples of
guarantee companies.
(iii) Unlimited companies:
A company not having a limit on the liability of its members
is termed as unlimited company. In case of such a company
every member is liable for the debts of the company as in
an ordinary partnership in proportion to his interest in the
company. Such companies are not popular in India.

(C) On the basis of number of members

(i) Private company:
A private company means a company which by its articles of
association:
(i) Restricts the right to transfer its shares
(ii) Limits the number of its members to fifty (excluding
members who are or were in the employment of the
company) and
(iii) Prohibits any invitation to the public to subscribe for any
shares or debentures of the company.
(iv) Where two or more persons hold one or more shares in
a company jointly, they are treated as a single member.
There should be at least two persons to form a private
company and the maximum number of members in a
private company cannot exceed 50. A private limited
company is required to add the words “Private Ltd” at the
end of its name.
(ii) Public company:
A public company means a company which is not a private
company. There must be at least seven persons to form a
public company. It is of the essence of a public company
that its articles do not contain provisions restricting the
number of its members or excluding generally the transfer
of its shares to the public or prohibiting any invitation to the
public to subscribe for its shares or debentures. Only the
shares of a public company are capable of being dealt in on
a stock exchange.

(D) According to Domicile

(i) Foreign company:
It means a company incorporated outside India and having
a place of business in India.
According to Section 591 a foreign company is one
incorporated outside India:
(a) Which established a place of business within India after
the commencement of this Act or (b) Which had a place of
business within India before the commencement of this Act
and continues to have the same at the commencement of
this Act.
(ii) Indian Companies
A company formed and registered in India is known as an
Indian Company.

(E) Miscellaneous Category

(i) Government Company:
It means any company in which not less than 51 percent of
the paid up share capital is held by the Central Govt, and/or
by any State Government or Governments or partly by the
Central Government and partly by one or more State
Governments. The subsidiary of a Government company is
also a Government company.
(ii) Holding and subsidiary companies:
A company is known as the holding company of another
company if it has control over another company. A company
is known as subsidiary of another company when control is
exercised by the latter over the former called a subsidiary
company. A company is to be deemed to be subsidiary
company of another
(a) If the other:
(a) Controls the composition of its Board of directors or
(b) Exercises or controls more than half of its total voting
power where it is an existing company in respect where of
the holders of preference shares issued before the
commencement of the Act have the same voting rights as
the holders of equity shares or
(c) In the case of any other company holds more than half in
nominal value of its equity share capital or
(b) If it is a subsidiary of a third company which is subsidiary
of the controlling company.
(iii) One man Company:
This is a company in which one man holds practically the
whole of the share capital of the company and in order to
meet the statutory requirement of minimum number of
members, some dummy members hold one or two shares
each. The dummy members are usually nominees of
principal shareholder. The principal shareholder is in a
position to enjoy the profits of the business with limited
liability. Such type of companies are perfectly valid and not
illegal.
FORMATION OF COMPANY

1. Promotion of a Company:
A business enterprise does not come into existence on its
own. It comes into existence as a result of the efforts of an
individual or group of people or an institution. That is, it has
to be promoted by some person or persons. The process of
business promotion begins with the conceiving of an idea
and ends when that idea is translated into action i.e., the
establishment of the business enterprise and
commencement of its business.
Who is a Promoter in a Company?
A successful promoter is a creator of wealth and an
economic prophet. The person who is concerned with the
promotion of business enterprise is known as the Promoter.
He conceives the idea of starting a business and takes all the
measures required for bringing the enterprise into existence.
For example, Dhirubhai Ambani is the promoter of Reliance
Industries.
The promoters find out the ways to collect money,
investigate business ideas arranges for finance, assembles
resources and establishes a going concern.
The company law has not given any legal status to
promoters. He stands in a fiduciary position.
Types of Promoters
Promoters are different types such as professional
promoters, occasional promoters, promoter companies,
financial promoters, entrepreneurs, lawyers and engineers.
2. Registration of a Company
It is registration that brings a company into existence. A
company is properly formed only when it is duly registered
under the Companies Act.
Procedure of Registration
In order to get the company registered, the important
documents required to be filed with the Registrar of
Companies are as follows.
1. Memorandum of Association: It is to be signed by a
minimum of 7 persons for a public company and by 2 in
case of a pvt company. It must be properly stamped.
2. Articles of Association: This document is signed by all
those persons who have signed the Memorandum of
Association.
3. List of Directors: A list of directors with their names,
address and occupation is to be prepared and filed with the
Registrar of Companies.
4. Written consent of the Directors: A written consent of the
directors that they have agreed to act as directors has to be
filed with the Registrar along with a written undertaking to
the effect that they will take qualification shares and will pay
for them.
5. Notice of the Address of the Registered Office: It is also
customary to file the notice of the address of the company’s
registered office at the time of incorporation. It is to be
given within 30 days after the date of incorporation.
6. Statutory Declaration: A statutory declaration by any
advocate of the Supreme Court or of a High Court, or an
attorney or pleader entitled to appear before a High Court
or a practicing chartered accountant in India, who engages
in the Company formation or by a person indicated in the
articles as director, managing director, Secretary or manager
of the company, mentioning that the requisites of the Act
and the rules there under have been complied with. It is to
be filed with the Registrar of Companies.
When the required documents have been filed with the
Registrar along with the prescribed fee, the Registrar
scrutinizes the documents. If the Registrar is satisfied, the
name of the company is entered in the register. Then the
Registrar issues a certificate known as Certificate of
Incorporation.
3. Certificate of Incorporation
On the registration of Memorandum of Association, Articles
of Association and other documents, the Registrar will issue
a certificate known as the ‘Certificate of Incorporation‘. The
issue of certificate is the evidence of the fact that the
company is incorporated and the requirements of the
Companies Act have been complied with.
4. Certificate of Commencement of Business
As soon as a private company gets the certification of
incorporation, it can can commence its business. A public
company can commence its business only after getting the
‘certificate of commencement of business‘. After the
company gets the certificate of incorporation, a public
company issues a prospectus for inviting the public to
subscribe to its share capital. It fixes the minimum
subscription. Then it is required to sell the minimum number
of shares mentioned in the prospectus.
After completing the sale of the required number of shares,
a certificate is sent to the Registrar along with a letter from
the bank stating that all the money is received.
The Registrar then scrutinizes the documents. If he is
satisfied he issues a certificate known as ‘Certificate of
Commencement of Business’. This is the conclusive evidence
for the Commencement of Business.
Dissolution of company

(1) When the affairs of a company have been

completely wound up or when the Court is of the
opinion that the liquidator cannot proceed with the
winding up of a company for want of funds and assets
or for any other reason whatsoever and it is just and
reasonable in the circumstances of the case that an
order of dissolution of the company should be made,
the Court shall make an order that the company be
dissolved from the date of the order, and the
company shall be dissolved accordingly.

(2) A copy of the order shall ; within thirty days from

the date thereof, be forwarded by the liquidator to the
Registrar who shall make in his books a minute of the
dissolution of the company.

(3) If the liquidator makes default in forwarding a copy

as aforesaid, he shall be punishable with fine which
may extend to five hundred rupees for every day
during which the default continues.

CONCLUSION

 A company is good for all like country,

investor, businessman, etc.
 Company engaged in corporate social
responsibility its good for common people of
the country
 A company deals in large scale so the
natural resources can be utilized in proper
manner.
REFERENCES

 CLASS NOTES
 C.B. GUPTA
 WWW.WIKIPEDIA.COM
 WWW.BUSINESSDICTIONARY.CO
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 WWW.STUDULECTURENOTES.CO
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