Company: Meaning, Definition and Key Characteristics under the Companies Act, 2013
This article is written by Ms. Swati Sharma , a student at the Faculty of Law (Delhi University). If you also want to publish your articles or case interpretations/summaries, send your work to niyamskanoon09@gmail.com
The concept of a company stands at the heart of modern commercial and corporate activity. It represents one of the most organised, regulated and efficient forms of business enterprise. With the evolution of company law in India, especially after the enactment of the Companies Act, 2013, the corporate framework has become more transparent, accountable and structured. Understanding what a company is and the legal principles that govern its functioning is fundamental for students, professionals and anyone engaged in business.
Definition of Company under the Act
Section 2(20) of the Companies Act, 2013 defines a company as:
A company incorporated under this Act or under any previous company law.
The term “previous company law” is defined under Section 2(70), which covers earlier statutes that governed the incorporation and regulation of companies in India.
Thus, a company derives its legal status strictly from law and comes into existence only by following the prescribed process of registration.
Characteristics of a Company
The following essential characteristics distinguish a company from other forms of business organisation:
1. Incorporation
A company is born only after it is registered under the Companies Act. This legal process, known as incorporation, separates a company from informal or unregistered business setups such as sole proprietorships or partnerships. Incorporation grants the company a legal identity and the power to operate as an independent entity.
2. Voluntary Association
- A company is generally formed through the voluntary association of individuals who come together with a common purpose, most often profit-making.
- Exception: Companies registered under Section 8 are not primarily profit-oriented; they function for charitable or non-profit objectives.
3. Artificial Person Created by Law
A company is considered an artificial legal person. While it does not possess physical form, the law recognises it as capable of:
- entering into contracts,
- owning property in its own name,
- borrowing funds,
- suing and being sued.
This legal personality gives it rights and obligations independent of those who manage or own it.
4. Not a Citizen
- Under Section 2(1)(f) of the Citizenship Act, 1955, a “person” does not include a company.
- Therefore, although a company is a legal person, it is not a citizen and cannot claim fundamental rights exclusive to natural persons such as the right to vote or the right of reservation.
5. Separate Legal Entity
Once incorporated, a company becomes entirely distinct from its members or shareholders. This means:
- the acts of shareholders do not bind the company, and
- the company’s liabilities are its own, not those of its members.
This principle was famously recognised in several judicial decisions and remains central to corporate law.
6. Limited Liability
One of the chief advantages of forming a company is limited liability. Shareholders are protected from personal liability beyond a certain extent.
Two forms of limited liability exist:
a. Company Limited by Guarantee
- Members guarantee a specific amount in the event the company winds up. They are liable only to the extent of this guaranteed amount.
b. Company Limited by Shares
- Members’ liability is limited to the unpaid portion of the shares they hold. Shareholders are not responsible for company debts with their personal assets.
7. Perpetual Succession
- A company enjoys uninterrupted existence. It is not affected by the death, insolvency, retirement or incapacity of any of its members.
- It continues until dissolved through lawful winding up. This feature ensures long-term stability in business operations.
8. Transferability of Shares
The ability to transfer ownership is a major advantage of the corporate structure.
- Public Company: Shares are freely transferable. Investors can buy or sell shares without restrictions.
- Private Company: Transfer of shares is restricted through provisions in the Articles of Association.
- One Person Company (OPC): There is only one shareholder; therefore, share transfer is not applicable.
9. Separate Property
A company has its own property, separate from the property of its shareholders.
This means:
- The company can buy, sell, use or manage property in its own name.
- Even if shareholders own shares, they do not own the company’s property.
- Shareholders cannot take or use company assets for personal reasons.
This clear separation helps protect the company’s money, land, buildings, and other assets, ensuring they are used only for the company’s business.
10. Limitation of Action
- A company’s powers and activities are restricted by its Memorandum of Association (MOA).
- Any act performed beyond the objectives and powers stated in the MOA is ultra vires (beyond authority) and therefore void.
- This doctrine ensures discipline, prevents misuse of powers and protects the interests of shareholders and creditors.
11. Separate Management
- Unlike sole proprietorships or partnerships, the owners (shareholders) do not manage the company’s day-to-day operations.
- Management responsibility lies with the Board of Directors, while shareholders simply enjoy profits or dividends. This separation enhances efficiency and accountability.
12. Termination of Existence
A company, having been created by law, can be dissolved only through a legal process of winding up.
This involves:
- paying company debts,
- settling claims,
- distributing remaining assets among shareholders, and
- finally, removing the company’s name from the register.
- Only after these steps does a company cease to exist.
13. Implications and Challenges
The corporate form provides significant advantages:
- ease in raising capital,
- professional management,
- continuity of existence,
- clear separation between ownership and control.
However, these benefits can also be misused. Fraudulent activities, misuse of corporate personality and attempts to evade legal responsibilities have led courts to develop the doctrine of lifting the corporate veil, allowing the law to look beyond the company’s separate identity in appropriate cases.
Conclusion
A company is a sophisticated legal structure designed to promote economic activity in a regulated, transparent and efficient manner. Its features such as separate legal entity, limited liability, perpetual succession and structured management make it the preferred choice for large-scale business operations. At the same time, the law maintains checks to prevent misuse and ensure that the corporate form serves public and economic interest responsibly.
