What Is a Company?

A company is a legal entity formed by a group of individuals to engage in and operate a business
(commercial or industrial) enterprise. The company generally determines which business structure it
chooses such as a partnership, proprietorship, or corporation. These structures also indicate the
ownership structure of the company.

They can also be distinguished between private and public companies. Both have different ownership
structures, regulations, and financial reporting requirements.

A company is essentially an artificial person, which means it is an entity separate from the individuals
who own, manage, and support its operations. Companies are generally organized to earn a profit from
business activities, though some may be structured as nonprofit charities. Each country has its own
hierarchy of company and corporate structures, though with many similarities.

A company has many of the same legal rights and responsibilities as a person does, like the ability to
enter into contracts, the right to sue (or be sued), borrow money, pay taxes, own assets, and hire
employees.

The benefits of starting a company include income diversification, a strong correlation between effort
and reward, creative freedom and flexibility. The disadvantages of starting a company include increased
financial responsibility, increased legal liability, long hours, responsibility for employees and
administrative staff, regulations, and tax issues.

Formation of a company

The memorandum of association and articles of association are the two charter documents, for setting
up of the company and its operations. ‘Memorandum of Association’ (MOA), is the root document of
the company, which contains all the basic details about the company. On the other hand, ‘Articles of
Association’ (AOA), is a document containing all the rules and regulations designed by the company.

While the MOA sets out the company’s constitution, and so it is the foundation on which the company is
built. Conversely, AOA contain rule that control the company’s internal affairs, management, and
conduct. Both, MOA and AOA, requires registration, with the Registrar of companies (ROC), when the
company goes for incorporation.
Comparison Chart

Definition of Memorandum of Association

Memorandum of Association (MOA) is the supreme public document which contains all those
information that are required for the company at the time of incorporation. It can also be said that a
company cannot be incorporated without memorandum. At the time of registration of the company, it
needs to be registered with the ROC (Registrar of Companies). It contains the objects, powers, and scope
of the company, beyond which a company is not allowed to work, i.e. it limits the range of activities of
the company.

Any person who deals with the company like shareholders, creditors, investors, etc. is presumed to have
read the company, i.e. they must know the company’s objects and its area of operations. The
Memorandum is also known as the charter of the company. There are six clauses of the Memorandum:

 Name Clause – Any company cannot register with a name which central government may think
unfit and also with a name that too nearly resembles with the name of any other company.

 Situation Clause – Every company must specify the name of the state in which the registered
office of the company is located.

 Object Clause – Main objects and additional objects of the company.

  Liability Clause – Details regarding the liabilities of the members of the company.

 Capital Clause – The total capital of the company.

 Subscription Clause – Details of subscribers, shares taken by them, witness, etc.

Definition of Articles of Association

Articles of Association (AOA) are the secondary document, which defines the rules and regulations made
by the company for its administration and day to day management. In addition to this, the articles
contain the rights, responsibilities, powers and duties of members and directors of the company. It also
includes the information about the accounts and audit of the company.

Every company must have its own articles. However, a public company limited by shares can adopt
Table A instead of Articles of Association. It comprises of all the necessary details regarding the internal
affairs and the management of the company. It is prepared for the persons inside the company, i.e.
members, employees, directors, etc. The governance of the company is done according to the rules
prescribed in it. The companies can frame its articles of association as per their requirement and choice.

Types of companies

Incorporation:

Chartered company- it is an association with investors or shareholders and incorporated and granted
rights by royal charter for the purpose of trade. This type of companies doesn’t exist now. Example- East
India Company, Bank of Japan.

Statutory company- A company may be incorporated by means of a special Act of the Parliament or any
state legislature. Example of statutory companies in India is the Life Insurance Corporation of India.

Registered company- It is a company which is registered under the companies act. After registration, the
registrar of the companies issues a Certificate of Incorporation.

Liability:

Unlimited- Where member’s liabilities are unlimited. Even members personal asset can be taken to clear
all the liabilities.

Limited- Where member’s liabilities are limited. Member gives fixed amount guarantee (for example if a
member gives guarantee that he/she will give an amount when the company will wind up to clear the
liabilities, then his/her liability will only arise of the time of winding up. Which means he/she will not be
liable throughout the lifetime, only at the time of winding up he/she will be liable). Members can be
limited by share capital. In private limited company there are restrictions. It has shareholders with
limited liability and its shares may not be offered to the general public. "Limited by shares" means that
the liability of the shareholders to creditors of the company is limited to the capital originally invested,
i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the
company. A shareholder's personal assets are thus protected in the event of the company's insolvency,
but any money invested in the company may be lost. The maximum number of member is limited by
200. In public company there is no restriction. They can offer shares to public and no limit of maximum
numbers of members

Control:

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.

: - Paid-up capital is the amount of money a company has received from shareholders in exchange for
shares of stock.

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 if the other company controls the composition of its Board
of directors or 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 in the case of any other company
holds more than half in nominal value of its equity share capital or if it is a subsidiary of a third company
which is subsidiary of the controlling company.

Associate company- if company A have a significant influence on company B, then B is an associate

company of A. if A has 20 to 50 percent shares of B, then it can be said that A has a significant influence
on B.

One man Company- This is a company in which one man holds practically the whole of the share capital
of the company and 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 is perfectly valid and not illegal.
Difference between a public and a private company:
Promoters-sec 2 (69)

 1. A promoter conceives an idea for the setting-up a business.

 2. He makes preliminary investigations and ensures about the future prospects of the business.

 3. He brings together various persons who agree to associate with him and share the business
responsibilities.

 4. He prepares various documents and gets the company incorporated.

 5. He raises the required finances and gets the company going.

Prospectus-sec 2(70)

 Prospectus- A document (approximate 300-500 pages)which has all the information about the
company. When an investor plan to invest in a company, he is given a booklet or document of
the company by that company. Promoter’s name is written in the prospectus.

 It is a notice, document, circular and advertisement through which a company appeal to public
to invest in the company. And through which investor or public decides whether to buy that
share or not.

 Public company use prospectus to give information to the public about the company to raise
fund. Private companies does not use prospectus as they are not allowed to show information
about the company.

 When a company give document to a existing shareholder to invite to buy a share then it dose
not call a prospectus.

 All the information of the company has to be true and accurate.

Some of the Contents of prospectus:

 The names, addresses and occupation of the directors, managing directors or managers etc.

 The power of a director and the remuneration of the directors.

 The estimated amount of preliminary expenses.

 Full details of the signatories to the memorandum and number of shares taken by them

 The number and classes of shares

 Details about reserves and surpluses

 The minimum amount of subscription and amount payable on application.

 Company's balance sheet and profit and loss account

 Reports of the auditors regarding profits and losses of the company

 The names and addresses of the auditors of the company

  Voting rights of the different classes of shares

 Subscription- the minimum amount on which the directors may proceed to allotment/ booked.

 Where shares are offered to the public for subscription, the prospectus must mention the
minimum amount which must be raised by the issue of shares before the company can
commence business.

 The minimum subscription is to be fixed by the directors or by the persons who have signed the
memorandum. Share cannot be allotted until application has been received sufficiently to cover
the minimum subscription.

Mis-Statements in Prospectus:

Mis-statements and false statements in the prospectus are instruments by which dishonest company
promoters may practice fraud on the public money. In order to prevent this practice the law imposes
certain duties and liabilities on those persons who are responsible for such issues.

If, however, the prospectus contains any mis-statement of a material fact, two types of liabilities will
arise.

They are:

(1) Civil Liability

(2) Criminal Liability

It is the duty of the authors of the prospectus to see that the prospectus does not contain any untrue
statement which may mislead the public.

In short, untrue statement means and includes any statement which is not only a false statement but
also a statement which creates a wrong impression of actual fact.

Civil Liability:

Sec. 62(1) of the Companies Act states that such persons are liable to pay compensation for any loss or
damage which any person may suffer from the purchase of any share or debenture on the basis of the
untrue statement. Consequently, a person who has suffered a loss may claim contribution from the
others who were associated relating to issue of prospect until it appears that he was guilty of fraud
while the others were not proved to be guilty.

Criminal Liability:
According to Sec. 63(1) of the Companies Act, every person who has authorized the issue of a
prospectus containing untrue statements shall be punishable with imprisonment which may extend to
two years or with fine which may extend to Rs. 5,000—or both.

Penalty:

Sec. 68 of the Companies Act provides that a person shall not, either knowingly or carelessly, by making
any statement, promise or forecast which is false, misleading of material facts, convince or attempt to
convince another person to enter into or to offer to enter into any

(i) agreement for acquiring, disposing-off, subscribing for or underwriting shares or debentures;

(ii) agreement, the purpose or pretended purpose of which is to secure a profit to any of the parties
from the yield of shares or debentures, or by inference to fluctuations in the value of shares or
debentures.

Otherwise, he shall be punishable with imprisonment for a term which may extend to 5 years or with
fine which may extend to Rs. 10,000—or with both.

 Underwriter- the underwriter is a new stock offering serves as the intermediary between the
company seeking to issue shares in an initial public offering (IPO) and investors.

 If the company want to issued share to the public to raise money, they will offer directly, or they
will do an agreement with the underwriter. Underwriter assumes the risk of buying the entire
inventory of stock issued in the IPO and sell to the public at the IPO price.

 It takes the whole responsibility to sell the shares to the public. And incase, if the shares are not
sold, it is called undersubscribe (the issues are being undersubscribe), the investment bank
(underwriter) takes the responsibility of buying them.

 The underwriter helps the company prepare for the IPO, considering issues such as the amount
of money sought to be raised, the type of securities to be issued, and the agreement between
the underwriter and the company.

 Investment banking- large financial institution. They charge a fee or commission of they sell
shares to the public from the company.

Capital, Shares and Shareholders

What is a Share?

A share can be described as an intangible accumulation of rights, interests and obligations. The reason
companies issue shares is to allow the company raise funds to carry out its activities and make a return
for its members. It also allows the ownership to change in a company.
Different share classes may have different rights so it is very important to review the articles of
association to understand the rights attached to the shares. Ordinary shares usually (but never
assume!!) have the following rights:

 A right to attend and vote at general meetings

 A right to a proportion of the profits of a company – dividend

 A right to the capital surplus on winding up

 A right to notice & information from Company

Types of share capital :-

1. Authorized / Registered / Nominal Capital :- This is the Maximum Capital which the company can raise
in its life time. This is mentioned in the Memorandum of the Association of the Company. This is also
called as Registered Capital or Nominal Capital.

2. Issued Capital :- This is the part of the Authorised Capital which is issued to the public for
Subscription.

3. Subscribed Capital :- Subscribed Capital is that part of issued Capital which has been taken off by the
public i.e. the capital for which applications are received from the public.

4. Called up Capital :- It is that portion of the subscribed capital which the shareholders are called upon
to pay on the shares allotted to them. A company does not necessarily require the full amount at once
on the shares subscribed and hence calls up only such portion as it needs. The balance then remaining is
known as uncalled capital.

5. Paid-up Capital: It refers to that part of the called up capital which has actually been paid by the
shareholders.

6. Uncalled capital :- The remaining part of subscribe capital not yet called up is known as Uncalled
Capital.

7. Reserve capital :- As mentioned above, the company by special resolution may determine that a
portion of the uncalled capital shall not be called up, except in the event of the winding up of the
company. This part is called Reserved Capital. It is kept reserved for the Creditors in case of the winding
up of the company.
Shareholder

Shareholders are the proprietors of the company. Therefore a share may be defined as an interest in the
company entitling the owner thereof to receive proportionate part of the profits, if any, and of a
proportionate part of the assets of the company upon liquidation, A shareholder has certain rights and
liabilities. Formerly it was thought that the shareholders are the proprietors of the company.

Classification of shares:

 Preferences share capital

 Equity shares capital

Preference shares

These will usually have a preferential right to a fixed amount of dividend, expressed as a percentage of
the nominal (par) value of the share, e.g. a £1, 7% preference share will carry a dividend of 7p each year.
It is, however, still a dividend and payable only out of profits. The dividend may be cumulative (i.e. if not
paid one year then accumulates to the next year) or non-cumulative. The presumption is that it is
cumulative. The dividend is usually restricted to a fixed amount, but alternatively the preference share
may be participating, in which case it participates in profits beyond the fixed dividend under some
formula.
Preference share are often non-voting (or non-voting except when their dividend is in arrears). They are
sometimes redeemable.
They may be given a priority on return of capital on a winding up. Often they will not be entitled to share
in surplus capital (i.e. they only get their £1 back on each £1 share).

Equity shares- all shares other than preference shares are called equity shares. The rights and privileges
of equity shareholders are laid down in the articles subject to the provisions of the Act.

Types of meeting

Statutory Meeting

This is the first meeting of the shareholders conducted after the commencement of the business of a
public company. Companies Act provides that every public company limited by shares or limited by
guarantee and having a share capital should hold a meeting of the shareholders within 6 months but not
earlier than one month from the date of commencement of business of the company.

Usually, the statutory meeting is the first general meeting of the company. It is conducted only once in
the lifetime of the company. A private company or a public company having no share capital need not
conduct a statutory meeting.

Annual General Meeting

The Annual General Meeting is one of the important meetings of a company. It is usually held once in a
year. AGM should be conducted by both private and public ltd companies whether limited by shares or
by guarantee; having or not having a share capital. As the name suggests, the meeting is to be held
annually to transact the ordinary business of the company.

Extra-ordinary General Meetings (EOGM)

Statutory Meeting and Annual General Meetings are called the ordinary meetings of a company. All
other general meetings other than these two are called Extraordinary General Meetings. As the very
name suggests, these meetings are convened to deal with all the extraordinary matters, which fall
outside the usual business of the Annual General Meetings.

EOGMs are generally called for transacting some urgent or special business, which cannot be postponed
till the next Annual General Meeting. Every business transacted at these meetings is called Special
Business.

Class Meetings

Class meetings are those meetings, which are held by the shareholders of a particular class of shares e.g.
preference shareholders or debenture holders.

Class meetings are generally conducted when it is proposed to alter, vary or affect the rights of a
particular class of shareholders. Thus, for effecting such changes it is necessary that a separate meeting
of the holders of those shares is to be held and the matter is to be approved at the meeting by a special
resolution.

For example, for cancelling the arrears of dividends on cumulative preference shares, it is necessary to
call for a meeting of such shareholders and pass a resolution as required by Companies Act. In case of
such a class meeting, the holders of other class of shares have no right to attend and vote.

Meetings of the Directors

Meetings of directors are called Board Meetings. These are the most important as well as the most
frequently held meetings of the company. It is only at these meetings that all important matters relating
to the company and its policies are discussed and decided upon.

Since the administration of the company lies in the hands of the Board, it should meet frequently for the
proper conduct of the business of the company. The Companies Act therefore gives wide discretion to
the directors to frame rules and regulations regarding the holding and conduct of Board meetings.

The directors of most companies frame rules concerning how, where and when they shall meet and how
their meetings would be regulated. These rules are commonly known as Standing Orders.

Meetings of Debenture Holders

The debenture holders of a particular class conduct these meeting. They are generally conducted when
the company wants to vary the terms of security or to modify their rights or to vary the rate of interest
payable etc. Rules and Regulations regarding the holding of the meetings of the debenture holders are
either entered in the Trust Deed or endorsed on the Debenture Bond so that they are binding upon the
holders of debentures and upon the company.

Meetings of the Creditors

These are not meetings of a company. They are held when the company proposes to make a scheme of
arrangements with its creditors. Companies like individuals may sometimes find it necessary to
compromise or make some arrangements with their creditors, In these circumstances, a meeting of the
creditors is necessary.

Secretary

A company secretary is a senior level employee in a company who is responsible for the looking after the
efficient administration of the company. The company secretary takes care of all the compliances with
statutory and regulatory requirements. The role of secretary is threefold; statutory officer, coordinator,
administrative officer. Apart from the three main roles, the company secretary is also responsible to
shareholders, depositors, creditors, debtors, employees etc. 

The secretarial work include maintenance of the books and registers required by the Companies Act,
issues of share certificates, certification of shares, the recording of transfer of shares etc. He attend
meetings, drafting the minutes, issuing notices of meeting and send returns to the registrar etc.

Summary of company management

The management of a company is carried out by its officers, who include a director, manager and/or
company secretary.

A director is appointed to carry out and control the day-to-day affairs of the company.

The structure, procedures and work of the board of directors, which as a body govern the company, are
determined by the company’s articles of association.

A manager is delegated supervisory control of the affairs of the company. A manager’s duties to the
company are generally more burdensome than those of the employees, who basically owe a duty of
confidentiality to the company.
A company’s auditors are appointed at general meetings. The auditors do not owe a duty to the
company as a legal entity, but, rather, to the shareholders, to whom the auditor’s report is addressed.