Key Characteristics of a Company: An Overview

By Sahil Kumar 11 Minutes Read

Introduction

• The term “company” in its literal sense refers to an association of individuals formed for a common purpose. Legally, a company is a voluntary association of persons recognized by law, bearing a distinct name and common seal, established to conduct business for profit. It possesses capital divided into transferable shares, limited liability, corporate status, and perpetual succession.
• Section 3(1)(i) of the Companies Act, 1956 defines a company as “a company formed and registered under this Act or an existing company.” Section 2(20) of the companies act, 2013 further clarifies that “A company means a company incorporated under this Act or under any previous company law”.
• Chief Justice Marshall of the United States defines a company as “a person, artificial, invisible, intangible, and existing only in the contemplation of the law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence.”^[1]
• According to Haney, “A Joint Stock Company is a voluntary association of individuals for profit, with a capital divided into transferable shares, the ownership of which is the condition of membership.”^[2]

Essential Characteristics of a Company

A company is a registered association, considered an artificial legal entity with an independent legal entity, perpetual succession, a common seal for its signatures, its capital consisting of transferable shares, and limited liability. Some key features of a company are as follows:

1. Incorporated Association

• An incorporated association comes into existence when a company is registered under the Companies Act. The company’s legal identity begins from the date specified in its certificate of incorporation.
• To form a public company, at least seven persons are required, while a private company requires a minimum of two persons. These individuals must subscribe to the Memorandum of Association and fulfill other legal requirements under the Act to successfully register and incorporate the company, either with or without limited liability under Section 3^[3].

2. Artificial Legal Person

• A company is considered an artificial legal person. Unlike a natural person, it only exists in the eyes of the law and cannot act independently. Instead, it operates through a board of directors, elected by the shareholders.
• As highlighted in Bath v. Standard Land Co.^[4], “The board of directors are the brains and the only brains of the company, which is the body, and the company can and does act only through them.”
• Despite its artificial nature, a company is regarded as a legal person for many purposes. It has the right to acquire and dispose of property, enter into contracts with third parties in its own name, and can sue or be sued in its own name.
• However, a company is not a citizen and does not enjoy rights under the Constitution of India or the Citizenship Act. In State Trading Corporation of India v. CTO^[5], the Supreme Court held that the provisions of the Constitution and the Citizenship Act do not apply to companies. While a company does not possess fundamental rights, it is still a legal person capable of entering into contracts with its directors, members, and outsiders.
• Justice Hidayatullah remarked that even if all the members are citizens of India, the company itself does not become a citizen of India.^[6]

3. Separate Legal Entity

• A company possesses a distinct legal entity, separate and independent from its members.
• This means that creditors can recover their dues only from the company’s assets and not from the personal assets of individual members.
• Likewise, the company is not liable for the personal debts of its members.^[7] The company’s property is meant to be used exclusively for its benefit and not for the personal benefit of shareholders.
• For this reason, shareholders cannot claim ownership rights over the company’s assets, whether individually or jointly, during the company’s operation or even in its winding up.

4. Perpetual Existence

• A company enjoys a stable form of business organization that continues regardless of changes in shareholders or directors. Its existence is unaffected by the death, insolvency, or retirement of any or all of its members.
• Only the law that created the company can dissolve it. Even if all members were to perish, as in the case of a private company whose members were killed by a bomb during a war, the company itself would survive.
• The company can be likened to a river, where the water constantly changes, but the river itself remains. Thus, a company enjoys perpetual existence, irrespective of changes in its membership.

5. Common Seal

• Since a company is an artificial entity and lacks the ability to physically sign documents, it acts through natural persons—its directors. However, documents must bear the company’s signature to be binding.
• The law provides for a common seal, engraved with the company’s name, as a substitute for its signature.
• Any document bearing the common seal is legally binding. The company’s Articles of Association may prescribe how the seal is to be affixed.
• If the Articles are silent, Regulation 84 of Table-A under the Companies Act, 2013 applies, requiring at least two directors, or  a director and the company secretary, or any other person authorized by the board, to sign any instrument to which the seal is affixed.

6. Limited Liability

• A company may be limited by shares or by guarantee. In a company limited by shares, the liability of members is confined to the unpaid value of their shares.
• For instance, if a share’s face value is Rs. 10 and the member has paid Rs. 7, they can be called upon to pay not more than Rs. 3 per share. In a company limited by guarantee, members’ liability is limited to the amount they agree to contribute to the company’s assets in the event of winding up.

7. Transferable Shares

• In a public company, shares are freely transferable, and this right is protected by law. While the company’s Articles may outline how transfers should be made and include reasonable restrictions, absolute prohibitions on share transfers are void.
• In private companies, transfer rights are restricted according to statutory provisions. Shareholders may appeal to the Central Government if the company refuses to register a share transfer.

8. Separate Property

• Since a company is a distinct legal person, it can own, enjoy, and dispose of property in its own name.
• While shareholders contribute capital and assets, they do not have ownership rights over the company’s property.
• The company itself is the real entity that controls and manages its assets.

9. Delegated Management

• A joint-stock company is self-governing and managed by elected representatives, known as directors.
• Since the company has numerous members, direct participation in management is impractical. Thus, shareholders delegate control to directors, who handle daily operations.
• Shareholders, through majority voting, determine the company’s general policy, ensuring that management follows democratic principles. Majority decision-making and centralized management ensure unified action.

Conclusion

A company, as defined by various legal and judicial interpretations, is a unique artificial legal entity formed through registration. Its key characteristics include separate legal existence, limited liability for shareholders, perpetual succession, and the ability to enter into contracts and own property independently of its members. While a company cannot act on its own and relies on its board of directors for operational activities, it enjoys several benefits such as limited liability and perpetual existence. The legal structure ensures that the company’s assets and liabilities are distinct from those of its shareholders, providing a stable business environment. These traits make the company an essential vehicle for conducting business in a corporate framework, ensuring both legal protection and operational efficiency.

^[1] Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819)

^[2] Haney, Lewis H. Business Organization and Combination. New York: Macmillan, 1913.

^[3] The Companies Act, 2013, No. 18 of 2013.

^[4] 10 Apr 1911 [1911] 1 Ch 618, CA.

^[5] 1963 AIR 1811.

^[6] Trading Corporation of India Ltd. v. Commercial Tax Officer (1963 AIR 1811).

^[7]Salomon v. Salomon & Co. Ltd. [1897] AC 22.

Sahil Kumar