The concept of a company is pivotal in corporate law. While businesses can be formed through sole ownership, partnerships, or LLPs, the company concept relates to limited liability, a separate legal persona, and an existence beyond the lives of its members. The Companies Act, 2013, in India, is the statute (primary legislation) defining and regulating companies in India.
This blog discusses the definition of a company in company law, the features and types of companies, and why this legal form is critical to modern economic transactions.
Introduction
When you hear the word company, you might immediately think of large corporations like Reliance, Tata, or Infosys but, legally, a company is much more than just a brand name or an organization – it is a legal entity separate in law.
The Companies Act, 2013 (which replaced the Companies Act, 1956) defines what a company is, how to create one, and the rules it must follow – as such, it is important for every entrepreneur, professional, investor, etc, to have some understanding of this definition because a company’s legal nature governs ownership, liability, and governance.
Legal Definition of Company
According to the Act –
Section 2(20) of the Companies Act, 2013 defines a company –
“Company means a company incorporated under this Act or under any previous company law.”
Following the above definition, we can conclude that –
- A company must be incorporated – registered with the Registrar of Companies (ROC)
- A company can be incorporated under either the Companies Act, 2013 or previous acts (for example, the Companies Act, 1956).
In sum, although organizations exist naturally, a company does not exist until it is registered.
Key Features of a Company
The statutory definition may seem simple, but company law and judicial precedents expand on its essential characteristics.
- Separate Legal Entity
A company is distinct from its members. It can own property, enter into contracts, sue or be sued in its own name.
- Case reference – Salomon v. Salomon & Co. Ltd. (UK) established this principle.
- Artificial Legal Person
A company is not a natural person but is recognized by law as a “person” with rights and obligations. It must act through its directors and officers.
- Perpetual Succession
The company continues to exist regardless of changes in membership. Shareholders may come and go, but the company’s existence is unaffected.
- Limited Liability
Shareholders’ liability is generally limited to the amount unpaid on their shares. They are not personally liable for the company’s debts.
- Common Seal (Earlier Mandatory)
Earlier, companies had to use a common seal to execute contracts. This requirement is now optional under the Companies Amendment Act, 2015.
- Transferability of Shares
In public companies, shares are freely transferable, which allows capital mobility and investment. Private companies, however, restrict share transfers.
Types of Companies Under Indian Law
The Companies Act, 2013, recognises companies in different types –
Based on Liability
- Company Limited by Shares – Liability is limited to the unpaid amount of shares not paid by the member.
- Company Limited by Guarantee – Liability is limited to the amount guaranteed upon winding up.
- Unlimited Company – Members’ liability is unlimited.
Based on Number of Members
- Private Limited Company – Minimum number of members is 2; maximum number of members is 200. Cannot invite the public to subscribe to the share capital.
- Public Company – Minimum number of members required is 7; there is no upper limit. Shares can be invited from the public.
- One Person Company (OPC) – This was introduced by the 2013 Act. This company has a single member. The liability is limited.
Based on Control and Ownership
- Holding and Subsidiaries
- Government Company (51% or more held or owned by the government)
- Foreign Company (has been incorporated outside India but is doing business in India)
The Significance of the Definition
Why is it significant to know the definition of a company? The definition of a company is important because –
- It identifies the legal identity of a business.
- It specifies the rights and duties of the members and directors;
- It establishes the compliance obligations of the company under the Companies Act.
- It provides the basis for tax obligations, liability, and governance obligations.
Judicial Interpretations of Company
Indian courts have given weight to the definition of a company in their landmark judicial decisions such as:
- State Trading Corporation of India v. Commercial Tax Officer (1963) defined a company as “not a citizen but a legal person,” therefore, it cannot enforce fundamental rights of a citizen;
- Vodafone International Holdings v. Union of India (2012) emphasized the importance of corporate structures and that the separate legal identity is relevant for taxation, the decision reaffirmed earlier cases to highlight that companies were separate legal persons but regulated by constitutional and statutory restrictions.
Reasons for a Company Structure
- Limited liability for shareholders.
- Greater accessibility to capital through shares.
- Perpetual succession to ensure operational longevity.
- Acts more credibly in the eyes of banks and investors.
Disadvantages of a Company Structure
- Higher regulatory burdens and compliance costs.
- More regulation than partnerships or proprietorships.
- Limitations on limited liability (e.g. fraud or sham), hence the ability for courts to lift the corporate veil.
Conclusion
The definition of a company in company law may seem simple, but the consequences are wide-ranging. A company is more than ‘a group of people carrying on a business’, it is a legal person in its own right, a legal entity with distinct rights, liabilities and perpetual existence.
The company incorporation process under the Companies Act will allow you to enjoy the benefits of limited liability and perpetual succession, but will also expose you to greater regulatory compliance. For anyone involved in business, either as a founder, investor or professional, understanding what a company means in legal terms is vital to contributing to their own sound judgement and to ensure compliance.
