Company is a common term which is used for businesses. In fact, this term has a legal recognition associated with it. In this blog we will explain this term in detail with our readers.
What is a company?
Company is typically a business which is legally recognized by courts, authorities, banks and securities commission. The founders and owners of the company have limited liability whereas, the corporation enjoys the perpetual succession and a legal personality. The personal liabilities of shareholders are different from their companies.
Let’s explore this concept in detail.
A company in simple words
In simple words, a company is a business which is registered with the government and a legal person just like its owners (stockholders / shareholders). This registered business has its stamp (seal), name and authorized real person to sign and execute contracts, manufacture, trade or provide services under its governing rules.
Other names for a company
This incorporated business model has different names in different countries:
- Company
- Corporation
- Corporates
- Limited liability company
- Incorporated business
It does not matter what name is used. However, the basic legal structure is the same.
Basic scheme of corporations
An incorporated business has:
- Shareholders (bring initial capital, trade shares / stocks, appoint directors)
- Board of Directors (act on behalf of shareholders, run the business)
- Separate trade name, stamp and office
- Liabilities like its business loans, payable to its suppliers etc.
- Assets like offices, buildings, factories, vehicles in its own name.
Regulator of companies
The securities exchange commission or the office of the registrar of companies or office of the joint stock company acts as regulator of corporate structures. When a company is registered, the registrar or the securities exchange issues a certificate of incorporation which is an evidence that the founders of the corporate can now carry on the business under its legal cover. Now, this registered business has its common seal and name for contracting and transacting business deals.
Meaning of Corporate legal personality (Doctrine of Legal personality)
There are two terms associated with the corporates: legal personality and perpetual succession. Companies can enter into agreements, make deals, execute transactions, procure material / stock in trade, make investments, and hire staff etc. These are the privileges enjoyed by a natural person when he is doing a business. It is the legal personality.
Meaning of Perpetual succession
Perpetual succession is the continuance existence of a company in spite of the change in ownership. The ownership of the business is reflected by the ownership of the share of the company.
When a shareholder dies, shares owned by him are transferred to his / her legal heirs. Shares are a property and the shareholder has the right to transfer them. Transfer of shares means the rights to receive dividends and rights to vote at general meetings are transferred to another person.
How does a company operate?
Company is owned by the shareholders and managed by its directors or stewards (old name for managers of joint stock companies). Directors are elected or appointed for a certain period of time by the shareholders in a general meeting. A general meeting of the shareholders (stockholders is another term for the shareholders). Directors are elected by voting of stockholders.
Directors act as agents of the stockholders and run / manage the company on their behalf. The business earns the profit and stockholders receive their share in profit (divisible profits) in proportion to their shareholding or rights to receive the dividends. The share of shareholders in the divisible profits of the company is referred to as the dividends.
History of a company
History of present-day corporations comes from the Joint stock companies. This concept evolved in the 18th and 19th centuries. Joint stock companies had limited liability with more than one investor who jointly injected capital in the business. This structure was duly registered with the Registrar of Joint Stock Companies and he issued a certificate of incorporation or registration.
In those centuries, mainly trade was via oceans and seas. It had great risk of loss due to pirates, interstate clashes, and intercontinental power games. Traders took loans from financial institutions or lenders. However, loan givers recovered their amounts from personal properties of owners in case their businesses could not repay.
So, the need of the concepts of legal personality and limited liability raised. It limited liability of stockholders to their initial investment or respective ratio (percentage) of ownership in equity.
Conclusion
In this blog we have explained this concept in sufficient details. We have also published blogs on relevant topics like benefits of a corporate structure, general meetings of members, members of a company, its formation, election of director, their powers and duties etc.
Hopefully, readers have enjoyed the blog.
Stay tuned for further updates and blogs.
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