Module 3

Definition of a Company:

A company is a legal entity that is formed by a group of individuals to engage in business activities, with
the purpose of making a profit. It has a distinct legal identity separate from its members and is
recognized as a person under the law.

Business vs. Company:

• Business: A business is an organization or economic system where goods and services

are exchanged for one another or for money. A business may be owned by an individual or a group and
can be either a sole proprietorship, partnership, or company.

• Company: A company is a specific type of business structure that is legally recognized as

a separate entity from its owners. It operates under the Companies Act, and its members are not
personally liable for the company’s debts.

Meaning of Firm:

A firm refers to a business or partnership engaged in commercial activities. It may involve two or more
people sharing profits and liabilities. In the legal context, a firm does not have its own separate legal
identity unless registered as a company.

Meaning of Business:

A business refers to any organization engaged in the production, sale, or distribution of goods and
services to meet consumer needs and generate profit.

Meaning of Company:

A company is a legal entity with a distinct identity, formed by a group of people for carrying out business
activities. It can enter into contracts, own assets, and be liable for its debts independently of its
members.

Features of a Company:

1. Separate Legal Entity: A company has its own legal identity, separate from its
shareholders or directors.

2. Perpetual Succession: A company continues to exist even if its members or directors

change. It is not affected by death, insolvency, or incapacity of its members.

3. Limited Liability: Shareholders’ liability is limited to the amount they have invested in
the company, meaning they are not personally liable for the company’s debts.
 4. Artificial Legal Person: A company is considered a person in the eyes of the law, with
rights and obligations separate from those of its members.

5. Common Seal: A company has a common seal that is used as an official signature to
execute documents, contracts, and deeds.

6. Transferability of Shares: Shares of a company can be transferred freely (in the case of
public companies), making it easier for investors to buy and sell ownership interests.

7. Separate Property: A company has its own property, which is distinct from the property
of its shareholders or directors.

8. Capacity to Sue: A company can sue and be sued in its own name.

Characteristics of a Company:

1. Separate Legal Entity: The company is a separate legal person from its owners and
directors.

2. Limited Liability: The owners (shareholders) are not personally liable for the company’s
debts beyond their shareholding.

3. Perpetual Succession: The existence of the company is not affected by the death or
departure of any member.

4. Common Seal: The company uses a common seal to authenticate official documents.

5. Transferability of Shares: Shares of the company can be transferred (in public

companies) to others without affecting the company’s operations.

6. Separate Property: The company owns its property, and its assets are distinct from
those of its shareholders.

7. Capacity to Sue: The company can initiate legal proceedings in its own name.

The Companies Act, 2013:

The Companies Act, 2013 governs the incorporation, operation, and dissolution of companies in India. It
replaces the Companies Act, 1956 and aims to ensure better regulation, governance, and transparency.
The Act was passed by the Indian Parliament and came into effect on September 12, 2013.

Objective of the act 2013

- To promote the development of the economy

- to encourage transparency and accountability

- to promote high standards of corporate governance

- to recognise new concepts and procedures to support business while protecting interests of all the
stakeholders

Types of companies

Types of Companies Based on Mode of Incorporation:

1. Chartered Companies: Incorporated under a royal charter granted by the Crown or

government.

2. Registered Companies: Incorporated under the Companies Act by registering with the
relevant authorities.

3. Statutory Companies: Formed by a specific act of Parliament, creating companies with

special functions.

Types of Companies Based on Liability of Shareholders:

1. Limited Company:

• Limited by Shares: Shareholders’ liability is limited to the unpaid amount on their

shares.

• Limited by Guarantee: Liability is limited to the amount shareholders agree to

contribute if the company is wound up.

2. Unlimited Company: Shareholders’ liability is unlimited, meaning they can be held

personally responsible for the company’s debts.

Types of Companies Based on Number of Members:

 1. 1 person Company: A company with only one shareholder, typically referred to as a One
Person Company (OPC).

2. Private Company: A company that restricts the transfer of shares and cannot have more
than 200 members.

3. Public Company: A company that can offer shares to the public and can have any
number of shareholders.

Types of Companies Based on Control:

1. Holding Company: A company that controls other companies by owning a majority of

their shares.

2. Subsidiary Company: A company controlled by a holding company, where the parent

owns the majority of shares.

Types of Companies Based on Nationality:

1. Indian Company: A company registered under the Companies Act, 2013 in India.

2. Foreign Company: A company incorporated outside India but doing business in India.

Types of Ownership:

1. Sole Proprietorship: A business owned and operated by a single individual.

2. Partnership: A business owned and operated by two or more individuals who share
profits and liabilities.

What is company formation?

It is the procedure of officially registering a limited company.

It is also known as company registration and company incorporation and it is the procedure of
registering a business as distinctive legal entity with companies house.

Company Formation: The process of establishing a company, including its legal and administrative steps.

• Public Company: Requires at least 7 persons to form.

• Private Company: Requires at least 2 persons.

• One Person Company (OPC): Requires only 1 person.

Stages in Company Formation:

1. Promotion Stage:
 • The first stage in the company formation process. It involves conceptualizing and
initiating the process of establishing a company. A promoter takes the responsibility of preparing and
submitting necessary documents for registration.

• Activities include identifying business objectives, preparing a business plan, and

gathering initial resources.

2. Registration Stage:

• In this stage, the company is formally registered with the relevant authorities, like the
Registrar of Companies (RoC). It involves submitting legal documents, including the Memorandum of
Association (MOA) and Articles of Association (AOA).

• After registration, the company is legally recognized.

3. Certificate of Incorporation:

• This is the official document issued by the Registrar of Companies after completing the
registration process. It confirms that the company has been successfully incorporated and is a legal
entity.

• The company can begin its operations after receiving this certificate.

4. Capital Subscription Stage:

• After incorporation, the company raises capital by issuing shares to shareholders. This
stage involves the company offering shares to the public or private investors to raise funds.

• The capital raised is used for business operations and growth.

5. Certificate of Commencement of Business:

• This certificate is issued to public companies, indicating that the company has
completed all legal formalities, including capital subscription, and can now start its business activities.

• It is required before a public company can begin any business operations or financial
transactions.

Meaning of Memorandum of Association (MOA):

The MOA defines the scope and objectives of the company’s activities. It is a fundamental document
that sets out the company’s constitution.

Meaning of Articles of Association (AOA):

The AOA outlines the internal rules and regulations of the company, detailing how it will be governed.
Prospectus:

A prospectus is a formal document issued by a company to offer shares or debentures to the public.

Contents of the prospectus

Share Capital:

• Share Capital refers to the money a company raises by issuing shares.

Shares represent ownership interests in the company and can be of two types:

• Preference Shares: Shares with fixed dividends but no voting rights.

• Equity Shares: Shares with voting rights and variable dividends.

Company Management:

Management refers to the people who make decisions regarding the company’s operations, such as
directors and executives.

How does company management work?

Company management involves the planning, organizing, directing, and controlling of resources to
achieve the company’s goals and objectives. It typically includes various key functions:

1. Planning: Setting company goals, defining strategies, and outlining the steps to achieve
them. This involves long-term and short-term planning.

2. Organizing: Arranging resources (human, financial, physical) and tasks to implement the
company’s strategies. This includes creating departments, assigning roles, and allocating resources.

3. Leading: Directing and motivating employees to work towards the company’s objectives.
This involves leadership, communication, and managing teams.

4. Controlling: Monitoring and evaluating the company’s performance to ensure it aligns

with the set goals. This includes adjusting strategies and processes as necessary to stay on track.

A business meeting is a gathering of people to discuss goals, plans, and objectives that relate to their
work. It is a formal event that usually involves a set agenda and can be used for a variety of purposes,
such as decision-making, problem-solving, brainstorming, or project planning.

What are the needs of meetings?

Make decisions and announce changes. Celebrate success and build relationships. Negotiate and resolve
conflicts and problems.

Meeting

The word meeting implies the coming together of a certain number of members for transacting the
business in the agenda for which a previous notice has been given.

Types of meetings

Informal Meetings: Casual and unstructured discussions, usually without a set agenda, meant for
brainstorming or quick chats.

Formal Meetings: Structured, planned meetings with a clear agenda, roles, and objectives, used for
decision-making or business discussions.
Proceedings:

Proceedings refer to the actions or steps taken during a meeting or in legal matters, such as disciplinary
proceedings, business proceedings, or employee proceedings.

Borrowing:

Borrowing involves a company obtaining funds from external sources.

• Short-term Borrowing: Borrowing with a repayment period of less than one year.

• Long-term Borrowing: Borrowing with a repayment period longer than one year.

What is Debenture?

Debentures are some of the debt instruments which can be used by government companies or
organizations for the purpose of issuing the loan.

What are characteristics of Deventures?

- Holders are the creditors of the company.

-Holders do not carry voting rights.

-Deventures are secure.

-Deventures are repayable after a fixed period of time.

Charges:

A charge refers to a legal claim or lien on the company’s assets to secure the repayment of a debt.

Accounts:

Books of Accounts are records maintained by the company for financial transactions and statements.

Auditor:

An auditor is a person who examines and verifies the company’s financial records.

Responsibilities include checking, documenting, and ensuring accuracy in accounts and compliance with
legal standards.

Responsibilities of an auditor

1. Examination

2. Checking of Books

3. Documentation
 4. Full Incorporation

5. Conventionality

6. Authentication of Assets and Liabilities

7. Statutory Consent

8. Disclosure

9. Facts

10. Integrity

Oppression and Mismanagement:

• Oppression: Acts by company members or management that unjustly harm the interests
of shareholders or creditors.

• Mismanagement: Failure to run the company according to prescribed norms and

standards.

Winding Up:

Winding Up is the process of closing down a company.

• Modes of Winding Up:

• Voluntary Winding Up: Initiated by the company’s members.

• Compulsory Winding Up: Ordered by a court due to failure to meet obligations.

Reasons for winding up

1 . failure to pay debts

2 . Insolvency

3 . Fraudulent activities

4 . Public interest