A company is an artificial person, invisible, intangible and existing only in the eyes of law. Despite not being a natural person, it acts through human beings and serves as a vehicle through which human beings pursue certain aims and objectives. Its nature and characteristics are quite distinct from other forms of organizations like sole proprietorships or partnerships. Some of the main characteristics which highlight its nature are:
Separate Legal Entity
One of the most important attributes that give a company its unique nature is that it is a separate legal entity, distinct from its members. It bears its own name, has an independent corporate personality, owns assets in its own name, enters into contracts under its own name and can sue and be sued in its own name. This principle was well established in the landmark case of Salomon v Salomon & Co. Ltd, wherein the House of Lords upheld the doctrine of corporate personality and stated that a company is a distinct legal person separate from its members, even if practically the company is being run by one person.
The corporate veil segregates the personality of the company from that of its members. Even though a company cannot function without human beings working for it, the liabilities of the members remain limited. The company has a right to sue even its own members. The assets of the company belong to the company alone during its existence and in case of winding up. Creditors can make a claim only on the assets of the company and not its members. Therefore, the company offers significant protection to members from personal liability.
In a company, the liability of every member or shareholder is limited to the extent of the amount remaining unpaid on the shares held by him. In other words, a shareholder is liable to pay only the uncalled amount on his shares when called upon, and nothing more. His private assets remain protected even if the liabilities of the company far exceed its assets and the company goes into liquidation.
A company has a continuous existence independent of its members. It remains unaffected and continues to exist despite the death, insolvency, incapacity of any member or all members. Members may come and go, but the company continues to exist in perpetuity until legally dissolved. A company can be terminated only by the process of winding up as per law. Perpetual succession allows the company’s functioning without interruptions and business carried on smoothly despite changes in members.
A company being an artificial person cannot sign documents for itself, and so it acts through a common seal which serves as the official signature of the company. The name of the company must be engraved on the common seal. Any document bearing the common seal binds the company. The common seal is affixed on documents approved by the Board of Directors or persons authorized by the Board. Its use and custody is regulated by the company’s Articles of Association. Strict compliance is ensured to prevent misuse.
Capacity to Sue and Be Sued
A company can institute legal proceedings against others in its own name and be sued by others under its own name. It can sue to enforce legal rights when loss is caused to the company or its property, personality or business is harmed. Legal proceedings against a company must be against the company itself and not its members individually. Members cannot file suits to seek redressal for wrongs against the company, even though they are affected indirectly.
A company being a juristic person is capable of owning, enjoying and disposing of property in its own name. It is an owner distinct from its members. During its existence and in case of winding up, the company’s property belongs to the company alone and not its members even if they hold virtually the entire share capital. Members hold shares in the company and have a right to receive dividends but they cannot claim ownership rights over the assets and property of the company.
A company can enter into contracts and enforce contractual rights in its own name. Members cannot enforce contracts entered into by the company, even if they hold majority shares. The privity of contract bars members from suing or being sued on company contracts as the company has a separate legal existence. Similarly, the company is not exposed to any contractual liabilities that members take on in their personal capacity.
The capital of the company is divided into transferable units called shares. Members can transfer their shares freely subject to restrictions in the company’s Articles. There is no permanent tie between the company and shareholders. Transferability of shares provides liquidity to shareholders and stability to the company. Stock exchanges further facilitate trading in shares. The free transfer of shares also enables members to adjust their interest in the company, which is another flexibility available.
The shareholders elect a board of directors to direct, manage and conduct the affairs of the company. Shareholders do not directly participate in the day-to-day management and functioning of the company which is carried out by professional managers appointed by the directors. There is thus a separation of ownership and management in a company.
Access to Capital and Capital Lock-in
A company can raise larger amounts of capital by issue of shares to the public and from the financial markets. It also has access to loans and debt. Investments stay locked in the company giving it permanent capital. The capital base of the company is not affected by the death, retirement or insolvency of individual members.
A company’s functioning is regulated by law. It is incorporated under the provisions of the Companies Act by registration with the Registrar of Companies. It must adhere to prescribed procedures, rules and regulations in all aspects including management, administration and taxation. This investors confidence in the company’s credibility and transparency.
Voluntary Association for Profit
A company is a voluntary incorporation by persons to undertake business activities for earning profit which is distributed to shareholders. The only exception is a company registered under Section 8 which is for promoting commerce, art, science, charity or other useful objectives and prohibits payment of dividend to members.
Termination by Law
A company being an artificial creation of law continues to exist till law ends its existence. Generally, it comes to an end through the legal process of winding up. However, legal devices like reorganization, reconstruction and amalgamation also terminate the existence of the company.
To summarise, a company has a distinct legal personality from its members. It provides benefits like limited liability, perpetual succession, transferable shares, access to large capital and professional management. Companies are regulated entities and must comply with legal provisions. The critical aspects that define the nature of a company and make it a popular form of business organization are its separate legal existence, limited liability for shareholders, ability to acquire assets and enter contracts in its own name and its direction by professional managers elected by shareholders. Companies are voluntary associations formed by members for the purpose of earning profit and regulated thoroughly by law.