A company is a natural legal entity formed by the association and group of people to work together towards achieving a common objective. It can be a commercial or an industrial enterprise. Different types of companies are taxed differently; therefore, the taxation of the company defines its type. Some of the main definitions of the company are as follows;
According to the definition of a company by the Indian Act 2013;
‘‘A registered association which is an artificial legal person, having an independent legal, entity with perpetual succession, a common seal for its signatures, a common capital comprised of transferable shares and carrying limited liability.’’
According to the US legal definition;
‘‘A company can be a corporation, partnership, association, joint-stock company, trust fund, or organized group of persons, whether incorporated or not, and (in official capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent, for any of the foregoing.’’
According to the British definition;
‘‘A company is a body corporate or an incorporated business organization registered under the companies act. It can be limited or unlimited company, private or a public company, company limited by guarantee or a company having share capital, or a community interest company.’’
Key Features of a Company
The key features and characteristics of a company are as follows;
The law treats the company as a legal artificial person because it has its name and bank accounts. It can also own property under its name, file a lawsuit against other companies or personals, or be partnered up with other companies. It performs all of the activities that a person can legally do; a company can do it well. Therefore, it acts as an artificial individual.
Separate Legal Entity
When we say legal entity, what it means that it’s completely independent of its people who control its operations. In other words, the company won’t be responsible if its members don’t pay their debt. The same goes for the company as well; that the members don’t have to pay for the debt of the company, if it’s unable to pay to its creditors.
A company starts its business operations when it is registered by the law and under the ordinance of the companies act. The registration process of a company is lengthy; it should have a memorandum of association, board of directors, share prices and shareholders, a name, office, phone number, address, and other legal documentation.
The liability of shareholders is limited to their share price only; it is in the limited companies by share. On the other hand, in the case of limited companies by guarantee, where the share of contributors is like an asset in the company; if the company goes bankrupt, then the shareholders have to pay a small amounts to cover up the loss of the company.
As we know that a company acts as an artificial legal individual, therefore, it has a stamp or seal with the name and address engraved on it. This stamp would be like the signature of the company. The stamp and company’s seal is used for the verification and authorization of various documents.
Unlike proprietorship, partnership or any other type of business, a company doesn’t depend upon its owners, board of directors, shareholders, or employees. Many people come and go in the company, but it stays. Therefore, the existence of the company is much stable than
Types of Companies
We can categorize companies based on various types like; liability, taxes, shares members and control. Some of those classifications are given below with examples;
Classification of Companies based on Liabilities
Companies Limited by Shares
As the name implies, the liability of the company is limited to the share price of each shareholder. Personal assets of the shareholders won’t be disturbed; their responsibilities are limited to their debt of the company up to their share price only.
Companies limited by shares can be public or private.
Companies Limited by Guarantee
Companies limited by guarantee doesn’t issue shares or have shareholder. They’re usually non-profit organizations. If in the case of profit, the company distributes it among its members if it’s not a charitable organization. If the company goes bankrupt, then their liability is limited to the amount they have pre-decided in the memorandum of the company. Guarantors are the members of the companies limited by guarantee.
As the name implies the liability of the shareholders is not limited to the share price they own, it goes beyond. They may lose their assets if the company is unable to pay debt to its creditors. We don’t see many unlimited companies because it involves a lot of risks.
Classification of Companies based on Members
One Person Company
One person company is an Indian concept where one person can create a company without having partners, board of directors or shareholders. In OPC, you’ll have all the advantages of sole proprietorship like; you don’t have to share profit with others, take the risk on your own without requiring approval from others. Your liabilities are limited like a company.
OPC has some differences with private limited companies like; you should mention the name of a person in the memorandum of association, who’d take the charge after your passing. The minimum capital for starting the OPC is 100,000.
ARADO Farms, VISHRUT Biotech, and HCARE Holistic Enterprise are some of the well known one-person companies.
A private company is a form of company that doesn’t offer its shares to the public like in the public companies. The numbers of shares are limited to the close members only. However, members can transfer their shares to anyone but they can’t offer it to the general public.
A private company also goes by the name of unlisted or unquoted company. Some people think that private companies are small because they aren’t public.
Some of the big companies like Dell (hardware and tech equipment), Virginia Atlantic (airline), PricewaterhouseCoopers (business supplier and Service Company), Mars (food and drink) and John Lewis Partnership (retail). These are all are the private companies that are doing their business across the world.
Public companies are those that advertise their stock and shares to the general public. People can freely trade the stock of the public company without any restrictions. The shares of listed companies are traded in the stock exchange market.
In England, a public company must have a minimum of two directors and shareholders respectively. It’s then it would fall into the category of public companies. It should have a total share value of £50,000.
When investors buy the stock of the company, then they become the equity owners of the company. Some companies are private in the beginning, later they become the public companies after fulfilling all the mandatory legal requirements.
Google, F5 Network, Chevron Corporation, Proctor and Gamble Company are some public companies; they also used to be the private companies. The reason companies move from private to public is because they need capital to expand their business operations.
Classification of Companies based on Control
The economy of a country plays a very important role in managing the GDP and index. Government companies are those that hold 51% of the share capital of the company. The remaining 49% of the share, the company offers it to the public and private individuals.
Mixed Ownership Company is also the name used for the government companies. Where we see the management and chain of hierarchy of government and technical skill of the private sector, it’s a great mixture of both public and private sectors.
Heavy Industry Taxila, Industrial Development Bank, Faisalabad Electric Supply Company, and Karachi Urban Transport Corporation, PTCL, Oil, and Gas Development Company are some of the examples of Government Companies.
Holding and Subsidiary Companies
Holding and Subsidiary companies are two companies; where holding is a parent company that controls the business operation of the subsidiary company. By control I mean the holding company has a complete over the selection and election of board of directors, it holds all the shareholders of the subsidiary company. The subsidiary company can make its decision once it’s become independent.
Subsidiary companies can be profit or non-profit organizations. The subsidiary company of West’s Encyclopaedia of American Law is 2008, Thompson and Thompson, and The Global Tutor are some of the examples of Holding and Subsidiary companies.
An associate company is the business valuation firm in which one company owns a significant voting share of another company. The voting share usually ranges from 20 to 50%, if it is more than 50%, then it would be subsidiary company. If it’s less than 50%, then the owner doesn’t have to consolidate the financial statement of associate. If it is more than 50%, then it has to consolidate the financial statement, where the associate would consider the balance sheet as an asset.
Establishing a public or a private company is a very long process and it requires a lot of paperwork. But the company helps you to raise capital, perhaps you won’t be able to raise without it. Before going to take the step of a company, it’s better to know the different types of companies and what type of company would be best for you.