Unit 1

Introduction to Company

Meaning of Company

Company is an association of persons who contribute money or money’s worth to a common stock
and employs it in some trade or business to share profit or loss arising there from.

Features of Company

Artificial Person – A company is an artificial person created by law. The Board of Directors acts on
behalf of the company.

Separate legal entity- A company is distinct from its owner. The property of the company has to be
used for the benefit of the company and not for the benefit of its members.

Perpetual Succession – The Company continues to exist irrespective of death, insolvency or

retirement of the members. The life of the company does not depend on the members. The company
continues to exist until it is put to an end by law.

Common Seal – Common Seal is like the signature of the company. All contracts are entered into by
the Board of Directors Company by affixing common seal of the company.

Legal Formation – The formation of company is governed by the rules and regulations laid down by
Companies Act, 2013.

Registration – A public company should have a minimum capital of Rs. 5 Lakhs and a Private
company should have a minimum capital of Rs. 1 Lakh for the purpose of registration.

Contractual Rights – As the company has separate legal entity different from its members, it can
enter into contract for the conduct of business in its own name.

Voluntary Association for profits – A company is formed to accomplish the stated goals and the
profit gained thereof is shared among the shareholders or saved for future expansion.

Limited liability –

• Limited by shares – Liability of members is limited to nominal value of shares held by him.
• Limited by guarantee – Members undertake to contribute nominal amount towards any
shortfall in company’s assets to settle its debt in the event of it being wound up.

Separate Property – A company has the right to own and transfer property, as it is a separate legal
entity.

Transferability of Shares- Shares is the interest of members of the company. Transfer of shares are
as per the conditions prescribed in Articles of Association.
Stages in the Formation of the Company

Joint Stock Company is a business entity in which different stocks are brought and owned by
shareholders. Each shareholder owns company stock based on which proportion of distribution of
profit/loss is determined.

Stages in the formation of Joint Stock Company is as follows –

Stage 1 - Promotion stage- Promotion is the first stage in the formation of a company. It involves
conceiving a business opportunity and taking and initiative to form a company so the particular shape
can be given to exploiting the available business opportunity.

Stage 2 -Incorporation stage- After completing the afore said formalities, promoters make an
application for the incorporation of the company. Necessary documents like MOA, AOA and
preliminary documents have to be filed with the registrar of companies of the state within which they
plan to establish the registered office of the company. A company is said to be incorporated when it
fulfills the formalities of registration and obtains the “Certificate of Incorporation” by the registrar of
companies.

• Private company can commence business immediately on receipt of certificate of

incorporation
• But public company commences business after capital subscription stage first among the
promoters and second for public.

Stage 3 - Capital raising stage- A public company can raise the required funds from the public
means of Issue of shares and debentures. For doing the same. It has to issue a prospectus which is an
invitation to the public to subscribe to the capital of the company.

Stage 4-Commencement of Business stage - If the amount of minimum subscription is raised

through new issue of shares, a public company applies to the registrar of companies for the issue of
certificate of commencement of business.

Highlights of Companies Act, 2013

• One Person Company (OPC) – It is a special provision in Companies Act, 2013. It means a
Private Company can have only one person as a member and a director of the company.
• Uniformity in financial year- Companies Act, 2013 prescribes uniformity in financial year
starting from 1st April of a particular year and ending on 31st March of next year.
• Woman Director – According to Companies Act, 2013 it is mandatory that the prescribed
class of companies to have at least one woman director in the board.
• Definition of Fraud – The new provision of Companies Act, 2013 defines Fraud in relation
to the affairs of the company. There was no specific punishment for the offence under
Companies Act, 1956.
• Private Company Registration – Maximum number of members in a private company is
increased from 50 to 200 members.
 • Resident Director – Every company must have a director who has stayed in India for a total
period of 182 days or more in the previous calendar year.
• Advancement of loans to directors – A company CANNOT advance any types of loans,
guarantee, and security to any of the directors of the company.
• DIN number – All existing directors must have a DIN number allotted by the Central
Government.
• Detailed Prospectus – The new act of 2013 requires a detailed prospectus to be issued and
the company cannot vary the terms of contract referred to in the prospectus without the
approval of shareholders by passing a special resolution in the meeting.
• Annual General Meeting – According to Companies Act, 2013 a company shall hold its
AGM within 9 months from the closure of first financial year.
• Valuation of Assets – Valuation of assets shall be made by a qualified registered valuer
appointed by the audit committee.
• Number of directors – The maximum number of directors is increased from 12 to 15 in
Companies Act, 2013.
• Resignation of Directors – The directors have to forward the copy of resignation to the
Registrar of Companies within 30 days of resignation.
• Corporate Social Responsibility (CSR) – 2% of average net profits of last 3 years has to be
mandatorily spent on CSR activities by companies having a prescribed net worth as per
Companies Act, 2013.

Types/Kinds of Company

1. One Person Company (OPC) – As per section 2(62) of Companies Act, 2013 One Person
Company means a company which has one person as its member.
OPC is a private company formed for a lawful purpose by one person as a member.
Features of OPC
• OPC has one person as a member/shareholder.
• OPC is a private company
• OPC can be a company limited by shares or limited by guarantee.
• The word OPC must be mentioned (below the name of the company.
2. Private Company - Private company as defined by Sec. 2 (68), means a company which has
a minimum paid-up capital of Rs 1 lakh or such higher paid-up capital as may be prescribed,
and whose articles of association contains the following restrictions:
a) Restricts the right of members to transfer its shares;
b) Limits the number of its members to 200 (except in case of One Person Company)
c) Prohibits any invitation to the public to subscribe for any securities of the company.
 A private limited company may be registered with only two members. A private limited
company is required to add the words ‘private’ (or pvt.) as part its name.
3. Public Company - [Sec. 2 (71)]
Public company as defined by Sec. 2 (71) means a company which
a) is not a private company;
b) Has a minimum paid-up capital of Rs 5 lakh or such higher paid-up capital, as may be
prescribed;
c) A public company must have a minimum of 7 members.
d) Shares are freely transferable.

Difference between a Private Company and a Public Company

Basis Private Company Public Company
Minimum number of members. 1 for OPC, 2 for other Private 7 Members
Company
Maximum number of members 200 members Unlimited
Minimum paid up capital. Rs. 1 Lakh Rs. 5 lakh.
Invitation to public A private company is But a public company can
prohibited to invite public to invite the public to subscribe to
subscribe to its shares or purchase its shares.
its share capital.
Transferability of shares. Restrictions on the transfer of Freely transferable.
shares.
Directors Minimum two directors Minimum three directors

4. Company Limited by Guarantee- It is a company having a liability of its members limited

to the amount they undertake to contribute to the assets of the company in the event of
winding up. E.g., Clubs, Trade Associations and Societies.

5. Company limited by Shares- It is company having liability of its members limited to the
amount unpaid on shares respectively held by them. It is payable during the existence of the
company. In case the shares are fully paid up that member has nothing to pay.

6. Government Company- A company in which majority of the share capital i.e., 51% of the
share capital is held by State Government or Central Government or partly by State or Central
Government.

7. Holding Company- A Parent Corporation that owns more than 51% of the share capital of
another company to control the majority composition of the board of directors of another
company for the purpose of decision making.

8. Subsidiary Company- A company in which the holding company

➢ Controls the composition on BOD.
➢ Holds more than 51% of total share capital.
9. Associate Company – It is a company in which other company has a significant influence but
not a subsidiary company. Significant influence means “control of at least 20% of the total
share capital but less than 50% of share capital of another company.”
10. Small Company- A company other than Public Company whose-
• Paid up share capital does not exceed Rs. 50 Lakhs.
• Turnover does not exceed 2 crores.
11. Foreign Company - Foreign companies are the companies incorporated outside India but
have established a place of business in India
12. Global Company – A Global Company is a company which operates in a global scale. It
views the whole world as one market and creates product that fits into any regional market
place.
13. Listed Company – A company whose shares are traded on official stock exchange. The
company should adhere to the listing requirements of the exchange which may include
minimum number of shares or minimum turnover.
14. Body Corporate – An entity which has a legal existence is called body corporate. It includes
private company, One Person Company, Small Company, Foreign Company etc.