MODULE 1 – INTRODUCTION
1.1 Introduction to Company
A company is an artificial legal person created under the Companies Act. It is a voluntary
association of persons who come together to carry out business activities with the objective of
earning profit. A company has a separate legal identity from its members and can own property,
enter into contracts, sue or be sued in its own name. It is managed by a board of directors
elected by shareholders. Companies play an important role in economic development by
mobilizing capital, generating employment, and promoting industrial growth.
1.2 Introduction
Business activities can be organized in different forms such as sole proprietorship, partnership,
and company. Among these forms, the company form of organization is considered the most
advanced and suitable for large-scale business operations. Companies are governed by legal
rules and regulations laid down in the Companies Act, 2013 in India. This Act regulates
formation, management, administration, and winding up of companies. Due to limited liability,
separate legal entity, and perpetual succession, companies attract investors and entrepreneurs.
1.3 Meaning and Definition of Company
The term company originates from the Latin words “com” meaning together and “panis”
meaning bread, implying a group of people sharing something together.
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.
According to Lord Justice Lindley, a company is an association of many persons who
contribute money or money’s worth to a common stock and use it for a common purpose. The
profit earned is shared among the members according to their shares.
Thus, a company is a legally recognized organization formed by persons for carrying on
business.
1.4 Characteristics of a Company
A company has several important characteristics:
Separate Legal Entity
A company is considered a separate legal person distinct from its members. It can own assets,
incur liabilities, and enter into contracts independently.
Limited Liability
The liability of shareholders is limited to the amount unpaid on their shares. Their personal
assets are not affected by company debts.
Perpetual Succession
A company continues to exist even if members die, retire, or transfer their shares. The company
has continuous existence.
Common Seal
Traditionally, a company used a common seal as its official signature on documents.
Transferability of Shares
Shares of a company can generally be transferred from one person to another, especially in
public companies.
Artificial Person
A company is created by law and does not have physical existence. It acts through directors
and officers.
Separate Property
Company property belongs to the company and not to individual shareholders.
1.5 Highlights of Companies Act 2013
The Companies Act 2013 replaced the Companies Act 1956 to improve corporate governance
and transparency.
Important highlights include:
● Introduction of One Person Company (OPC).
● Mandatory Corporate Social Responsibility (CSR) for certain companies.
● Increased accountability of directors.
● E-governance and online company registration.
● Class action suits for protection of investors.
● Women director requirement in certain companies.
● Strengthening of auditing and financial reporting standards.
The Act aims to make company operations transparent, responsible, and investor-friendly.
1.6 Types of Companies
Companies can be classified in various ways based on liability, ownership, control, and size.
Major types include:
● Company limited by shares
● Company limited by guarantee
● Private company
● Public company
● One person company
● Holding company
● Subsidiary company
● Associate company
● Government company
● Foreign company
● Small company
● Listed company
These classifications help regulate companies according to their nature and operations.
1.7 Company Limited by Shares
A company limited by shares is one in which the liability of members is limited to the amount
unpaid on the shares they hold. If a shareholder has paid the full value of their shares, they
have no further liability. This is the most common form of company used for business activities.
Shareholders contribute capital through shares and receive dividends as profit distribution.
1.8 Company Limited by Guarantee
In this type of company, the liability of members is limited to the amount they agree to contribute
if the company is wound up. Members do not usually invest share capital but guarantee a
certain amount. Such companies are generally formed for non-profit purposes such as clubs,
charitable organizations, educational institutions, and trade associations.
1.9 Private Company and Public Company
Private Company
A private company restricts the transfer of shares and limits the number of members (maximum
200). It cannot invite the public to subscribe to its shares. It enjoys more operational flexibility
and fewer regulatory requirements.
Public Company
A public company allows free transfer of shares and can invite the public to subscribe to its
shares or debentures. It requires a minimum of seven members and is subject to stricter legal
regulations.
1.10 One Person Company (OPC)
A One Person Company is a company formed by a single individual as its sole member.
Introduced under the Companies Act 2013, OPC allows entrepreneurs to start a company with
limited liability without needing partners. The owner has full control over the company while
enjoying benefits of corporate status.
1.11 Holding Company
A holding company is a company that controls another company by owning a majority of its
shares or voting rights. The company being controlled is called a subsidiary company. The
holding company can influence management and decision-making of the subsidiary.
1.12 Subsidiary Company
A subsidiary company is a company controlled by another company known as the holding
company. Control may occur through majority shareholding or power to appoint directors.
Although controlled by the holding company, the subsidiary remains a separate legal entity.
1.13 Associate Company
An associate company is a company in which another company has significant influence but not
full control. Significant influence usually means holding at least 20% of the share capital or
voting power. Associate companies operate independently but maintain strategic relationships.
1.14 Government Company
A government company is one in which 51% or more of the share capital is owned by the
Central Government, State Government, or both. These companies are formed to undertake
public sector activities such as transportation, energy, or infrastructure development.
1.15 Foreign Company
A foreign company is a company incorporated outside India but conducting business in India
through a branch, office, or other means. Such companies must comply with the provisions of
the Companies Act 2013 regarding registration and reporting.
1.16 Small Company
A small company is a private company with limited capital and turnover as prescribed under the
Companies Act. These companies receive certain regulatory benefits such as reduced
compliance requirements to encourage small business growth.
1.17 Listed Company
A listed company is one whose shares are listed and traded on a recognized stock exchange
such as NSE or BSE. These companies must follow strict regulations regarding financial
disclosure, corporate governance, and investor protection.
1.18 Global Company
A global company operates in multiple countries and markets worldwide. Such companies
manage production, marketing, and operations across different nations. Global companies
contribute to international trade and economic integration.
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Here is the Difference between Private Company and Public Company in clear points
(useful for exams and notes).
Basis Private Company Public Company
Definition A company that restricts the A company that allows the
transfer of shares and does public to subscribe to its
not invite the public to shares and debentures.
subscribe to its shares.
Minimum Members Minimum 2 members Minimum 7 members
required. required.
Maximum Members Maximum 200 members No limit on maximum
(excluding employees). members.
Transfer of Shares Transfer of shares is Shares are freely
restricted. transferable.
Invitation to Public Cannot invite the public to Can invite the general public
subscribe to shares or to subscribe to shares.
debentures.
Minimum Directors Minimum 2 directors. Minimum 3 directors.
Name of Company Ends with “Private Limited Ends with “Limited (Ltd)”.
(Pvt Ltd)”.
Issue of Prospectus Not required to issue a Must issue a prospectus
prospectus. when inviting public
investment.
Commencement of Can start business Must obtain certificate of
Business immediately after commencement before
incorporation. starting business.
Regulations Fewer legal formalities and More legal formalities and
regulations. stricter regulations.