What is a company
A company is an Artificial Person created by law, it is invisible & Intangible and not affected by any change in its members. In India companies are formed and Registered by the Indian companies Act 1956. A company is a Separate Legal entity and not affected by the death or insolvency of its members.
Companies registered under the Indian companies’ act 1956 have a common seal which should be stamped on each and every document of the company. Companies Act 1956 defines company as:
(1) “company” means a company formed and registered under this Act or an existing company defined in clause (ii):
(ii) “existing company” means a company formed and registered under any of the previous companies laws
According to Lord Justice Lindley,” It is an association of persons who contribute money or money’s worth to a common stock and employ it for some common purpose.”
According to Justice Marshall, “A corporation is an artificial being invisible, intangible and existing only in the contemplation of law.”
“A company is an artificial person, created by law, having separate entity with perpetual succession and a common seal.” — L.H.Haney
“A limited company is an entity in the eyes of the law and can sue and be sued, hold property,deal with property, etc., in its own name.” — J.R.Batliboi
Features/Elements/Characteristics of a company
1.Incorporated Association: In India a company can be created under the Companies Act 1956. It is treated as an artificial legal person in the eyes of the law. Therefore registration of company is compulsory under the companies Act.
2. Separate Legal Entity and Perpetual Existence: it has a distinct legal entity, separate from its members. Any change in the members or Death or Insolvency of its members will not affect the working of the company. As an legal artificial person it can act in its own name L.e. company can contract, acquire property in its own name, sue others and can be sued by others.
3. Limited Liability: Every shareholder has limited liability only up to the amount he has contributed for the shares allotted to him. A shareholder having fully paid up shares no longer has any liability. In simple words, no shareholder of it is liable to be called upon to contribute any sum beyond the face value of the actual shares.
4. Transferability of shares: A shareholder contributes to the capital of the firm by subscribing to the shares of it, in case of Public Ltd. Company Shareholders can transfer such shares without the consent of the other members but in Private Ltd. Companies it is restricted.
5. Common Seal: it is a legal artificial person and not a natural person, it cannot sign its documents like a natural person. Hence it should have a ‘Common Seal’ to enable it to sign its documents. In simple words common seal of it affixed on each and every document of it.
Types of the Companies
1. Statutory Company: Only those companies are called statutory companies which are created through a special Act of Parliament. These companies are not suppose to use the word ‘Limited’ with their name, for example Reserve Bank of India.
2. Government Companies: According to Section 617 of The Companies Act, 1956. “A government company means in which not less than51% of the paid-up capital is held by the Central Government and partly by one or more State Governments, or includes a company which is a subsidiary of a Government Company.”
3. Registered Company: In India only those companies are called Registered companies which are Registered under the Companies Act 1956.
4. Holding Company: A holding company is a company which owns controlling shares in another companies (assuming all of these companies are corporations), or a corporation organized to own and control other corporations. This ntrol usually comes through owning a controlling interest (more than 50 percent) of the stock of the other companies, which are considered subsidiary companies.
5. Subsidiary Company: A company having more than half of its stock owned by another company.
6. Public Company: i) “public company” means which is not a private company. ii] Paid up capital of a public company should not be less than Rs.5 Lakhs. iii) A private company which is a subsidiary of a public company.
7. Private Company: According to Companies Act 1956, a “private company” means a company which, by its articles-
(a) Restricts the right to transfer its shares, if any;
(b) Limits the number of its members to fifty not including –
(i) Persons who are in the employment of the company, and
(ii) Persons who having been formerly in the employment of the companies, were members of the companies while in that employment and have continued to be members after the employment ceased; and
(c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the companies: Provided that where two or more persons hold one or more shares in a companies jointly, they shall, for the purposes of this definition, be treated as a single member.
Distinction between partnership and a Joint Stock Company
Distinction between Private Company and Public Company
Incorporation of a company
Prospectus : –
“Prospectus means an invitation to the public for the subscription of its shares or debentures” — Section 2 (36) of the Companies Act 1956
Commencement of Business
It is compulsory for a companies to receive the Certificate for Commencement of business, without this certificate companies cannot start its business. Following conditions are compulsory to fulfill.
a) companies has been filed with the Registrar of companies the prospectus or a statement in lieu of prospectus.
b) companies should declare that shares payable in cash are allotted with the amount of minimum subscription (Which is mentioned in prospectus)
c) Every director of the companies has paid to the company, on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash.
d) It will be certified by the director or companies secretary that all the requirements of the companies act 1956, are complied with.
No allotment shall be made of any share capital of a companies offered to the public for subscription, unless the amount in the prospectus, as the minimum amount, which in the opinion of the Board f directors, must be raised by the issue of share capital in order to meet the need of the business operations of the companies relating to:
1. To Buy the Assets for the companies
2. To meet the preliminary expenses and commission payable
3. To pay the money borrowed (Loan) if taken for the Purchase of assets or to pay the preliminary expenses and commission
4. To Meet the working capital requirements
5. To Meet the other expenditure of the business operations of the companies
Minimum Subscription [Guidelines issued by SEBI]
If the companies does not receive the minimum subscription of 90% of the issued amount on the date of closure of the issue, or if the subscription level falls below 90% after the closure of issue, the companies shall forthwith refund the entire subscription amount received. If there is a delay beyond 8 days after the companies becomes liable to pay the amount, the companies shall pay interest at the rate of 15% per annum for the period of delay.
Share Capital of a Company
A company does not have its own capital. It is raised by its shareholders by subscribing to the shares of the companies. Share capital is that money which is contributed by its shareholders.
Types of Share Capital
1. Authorized/Registered/Nominal capital: This capital is represented by the ‘Capital Clause’ of the Memorandum of Association by which the companies are Registered. Only after the Registration a companies can issue its shares. Company can issue shares fully or partially with the specified denomination i.e. Rs 10, Rs.50, Rs.100 etc..
2. Issued Capital: Issued Share Capital is the total of the share capital issued to shareholders. This may be Equal or less than the authorized capital. Students must remember that issued capital is that part of the authorized capital which is offered to the public for subscription, including the shares offered to the vendors for subscription other than cash and shares allotted as bonus shares. Some part of authorized capital may be kept within the companies which can be offered later which is known as ‘Unissued Capital’.
3. Subscribed Capital: Subscribed capital is that portion of the issued capital which has been subscribed by the public. This may be equal or less than the issued share capital as there may be capital for which no applications have been received yet (‘unsubscribed capital’).
4. Called-up Capital: Called-up capital is that portion of the subscribed capital which shareholder will pay to the companies on the shares allotted to them. For example if the face value of a share is Rs.20 and the company has called up only Rs.16 per share, in such a case the called up capital is Rs.16 and uncalled capital is Rs.4, which may be collected by the company later.
5. Paid-up Capital: Paid up Share Capital is that amount of share capital which is paid by the shareholders. Paid up capital may be equal or less than the called up capital as payments may be in arrears which is known as Calls-in-Arrears. In simple words, it is the actual amount paid by the shareholders.
6. Uncalled Capital : Uncalled capital is that portion of the subscribed capital which has not yet been called-up in the beginning, company may called this amount from the shareholders any time according to the need of funds.
7. Reserve Capital: Reserve Capital is that Part of the authorized capital which has not been called up by the company. Reserve capital helps in paying the creditors’ at the time of liquidation.
Difference between Capital Reserve and Reserve Capital
What is a Share?
A share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company or can be purchased from the stock market. A company is an Artificial Legal person and does not have its own capital. It is raised by its shareholders by subscribing to the shares of the company.
In simple words, the total share capital of the company is divided into units of small denomination (Rs.10, Rs.50 or Rs.100 etc) each unit is known as Share.
A ‘Share’ represents a unit into which capital of a company is divided.
Kinds of Shares:
1. Preference Shares
2. Equity Shares
Meaning of Preference Share
Preference Share means, that part of the share capital of the company which fulfils both the following requirements, namely
• Preference with respect to dividend at a fixed rate or of a fixed amount.
• Preference with respect to return of capital in case of winding up.
Section 85 (1) “Preference share capital” means, that part of the share capital of the company which fulfils both the following requirements, namely: (a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an a ount calculated : a fixed rate, which may be either free of or subject to income tax and (b) that as respect capital, it carries or will carry, on a winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid-up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts namely: (1) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding up or repayment of capital; and (ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.
Types of Preference Share
Cumulative Preference Shares:
It carries the right of dividend, which is to be paid out of the current year profit, but if current year profit is not sufficient then it will be paid out of future profit.
Non-Cumulative Preference Shares:
It carries the right of dividend, which is to be paid out of the current year profit, only.
Participating Preference Shares:
It carries the right of fixed dividend, they are also allowed to participate in the surplus profits (if any) once the equity shareholders are paid off.
Non-Paricipating Preference Shares:
It carries the right of fixed dividend only, they are not allowed to participate in the surplus profits.
Redemable Preference Shares:
These shares are issued with a condition that company will make the repayment on these shares after a fixed period or at the time of liquidation of the company i (whichever is earlier)
Non-Redemable Preference Shares:
These shares are not issued with any condition of redemption.
Convertible Preference Shares:
These shares can be converted into the equity shares (with term & conditions)
Non-Convertible Preference Shares:
These shores can not be converted into the equity shares
Equity Share: “Equity share capital means, with reference to any such company, all share capital which is not preference share capital. Equity share holders are paid to the whole of the profits made by the company after the fixed dividends payable on the preference shares.
Equity share is also known as ordinary shares
Dividend on these shares is not fixed
They are allowed to take part in the management of the business
At the time of winding up Equity share holders are repaid after the preference shareholders.
Distinguish between a preference share and an equity share
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