A company is more than just a business setup; it is a legal entity created and governed by statutes. Under the Companies Act, 2013, the structure and functioning of companies in India are defined in detail. What sets a company apart from other business structures like sole proprietorships or partnerships is its unique set of characteristics.
This blog explains the main characteristics of a company in company law, why they matter, and how they impact business owners, investors, and stakeholders.
Introduction
Entrepreneurs face multiple options when making decisions on how to operate their business: sole proprietorship, partnership, limited liability partnership, or private limited company. There are advantages and disadvantages for each model of business. However, companies represent a unique structure because of the privileges they grant, such as separate legal personality, limited liability and perpetual succession.
These attributes are the reasons many medium to large-scale businesses that may wish to attract external investment prefer the company structure. Let us take this opportunity to explore the main aspects of a company as defined in legislation and judicial interpretation.
Key Characteristics of the Company
1. Separate Legal Entity
One of the most important characteristics is that a company has its own legal identity, distinct from its shareholders and directors.
- It can own property in its own name.
- It can sue and be sued.
- Its existence is not dependent on its members.
Example- In Salomon v. Salomon & Co. Ltd., the House of Lords established the principle that a company is separate from the people who own it.
2. Artificial Legal Person
A company is not a natural human being, but the law treats it as a “person” capable of rights and duties.
- It can enter into contracts.
- It can own assets and incur liabilities.
- However, since it has no physical existence, it must act through its directors and officers.
3. Perpetual Succession
Unlike a partnership or proprietorship, a company doesn’t cease to exist when members leave, die, or transfer their shares. A company continues until it is legally wound up. This provides protection and stability and allows for long-term continuation of the business.
4. Limited Liability of Members
Shareholders are only liable for their investment in shares. The assets of the shareholders are protected if the company loses money or incurs debts.
- For companies limited by shares, the liability is limited to the unpaid value of shares.
- For companies limited by guarantee, liability is limited to the amount guaranteed, which is agreed in the memorandum.
This is one of the reasons investing in companies is less risky compared to limited partnerships.
5. Transferability of Shares
In a public company, shares of the company may be freely bought or sold; such transactions would not affect the company’s existence at all. This facilitates liquidity of the investment and provides encouragement for capital inflow.
Private companies do have restrictions placed on share transfers in their Articles of Association.
6. Common Seal (Option)
In the past, companies were required to have a common seal to establish their signature on official documents. The Companies (Amendment) Act, 2015, made it optional for a company to have a common seal.
Directors can just endorse documents without a seal, making compliance easier.
7. Capacity to Own Property
The company is a legal entity; it can own (enjoy ownership), and dispose of property in the name of the company. Membership does not grant ownership rights over the company’s property just because a person is a member.
Example: Bacha F. Guzdar v. CIT held that ‘a shareholder is not a co-owner of the property of a company’. The position of a shareholder is different; they hold a legal title in share certificates and as a member in the record book of the Company.
8. Separate Management and Ownership
In companies, owners (shareholders) and managers (directors) are different.
- Shareholders provide capital and appoint directors.
- Directors run day-to-day operations.
This separation ensures professional management and scalability.
9. Capacity to Sue and Be Sued
A company can enforce its legal rights by suing others, and it can also be sued for breach of contracts or other liabilities. This flows directly from its separate legal identity.
10. Regulated by Law
Companies are formed and governed strictly by the Companies Act, 2013. They must comply with statutory requirements such as –
- Filing annual returns and financial statements.
- Holding board meetings and annual general meetings.
- Maintaining proper books of accounts.
Failure to comply can lead to penalties and even winding up.
11. Separate Citizenship and Residence
A company is a legal person, not a citizen. A company cannot claim fundamental rights, such as the right to vote. It can be a resident or a non-resident for tax purposes, based on its real control and management.
12. The Corporate Veil and Lifting of the Veil
The law respects the company’s separate identity in most situations. However, when fraud, tax avoidance or abuse of corporate structure occurs, the corporate veil can be lifted, and it courts can hold directors and shareholders personally liable.
Why These Characteristics Matter?
Understanding these characteristics leads to:
- Understanding what business structure is best,
- Understanding the rights and liabilities of shareholders,
- Understanding legal and statutory compliance,
- Building trust with investors, lenders, regulators, etc.
Conclusion
The features of a company under company law explain why this type of business structure is very popular. Many features, like limited liability, perpetual succession, and separate legal entity, make this structure attractive to both investors and people seeking to start a business.
Though there are advantages, with them come responsibilities for companies, as they also must operate under strict legal and compliance structures. Therefore, if you intend to create or invest in a company, it’s crucial to understand these attributes for organisational and legal decision-making.
Reference
The Companies Act, 2013 (Act No. 18 of 2013)
https://www.mca.gov.in/
