Question

Explain the essential characteristics of a company.

Answer 1

The characteristics of a company are as follows:

1. Separate Legal Existence: A company is a legal entity that exists independently from its members. It can own property, form contracts, and file lawsuits in its own name. Shareholders are not joint owners of the company’s property and cannot be held responsible for the company’s actions. Contracts can exist between a corporation and its members, but a creditor of the company is not a creditor of the members. The case of Salomon vs. Salomon and Co. Ltd. established the company as a separate legal entity.
2. Perpetual Succession: A company is a creation of the law and only the law can bring an end to its existence. Its life does not depend on the life of its members. The death, insolvency or lunacy of members does not affect the life of a company. It continues to exist even if all its members die. Members may come and go but the company goes on until it is wound up.
3. Limited Liability: A firm has a separate legal existence, thus, its members cannot be held liable for its debts. Each member’s liability is restricted to the nominal value of their shares or the amount they guarantee. For example, if a member has 50 shares of ₹ 10 each, their liability is restricted to approximately $500. Even if the company’s assets are insufficient to cover all creditors’ claims, no member is obligated to pay more than their share. Members of the firm have the option to form a company with limitless liability.
4. Transferability of Shares: A company’s capital is divided into several pieces. Each part is referred to as a share. These shares are generally transferable. Shareholders can withdraw their membership from the company by transferring shares. However, share transfers are subject to certain restrictions.
5. Common Seal: A firm is an artificial entity and cannot act or sign itself. Therefore, it operates through humans. The company’s common seal authorises all of its acts. The company’s consent is indicated by affixing the common seal to all key documents. The common seal serves as the formal signature of the company. Documents without the company’s common seal are not binding.
6. Separation of Ownership and Control: Members are not permitted to directly participate in the day-to-day operation of a corporation. They select representatives, known as directors, to run the company’s activities on their behalf. Shareholders own the corporation, while the Board of Directors manages it.
7. Voluntary Association: A joint stock company is a voluntary organisation of individuals created to achieve a shared aim. Company members have the freedom to join and quit as they see fit.
8. Artificial Legal Person: A company is a legal entity that lacks the physical form of a human individual. It exists only in the contemplation of law. It can enter into contracts and own property in its own name.