Objectives:
1.
To
understand the meaning and characteristic features of company form of
organisation.
2.
To
understand the different kinds of companies
3.
To
understand the merits and limitations of company form of organisation
The scientific and technological
developments, efficient means of transport and communication and the socio
cultural development of the people have necessitated the expansion of business,
industry and commerce. The sole proprietorship and partnerships could not cope
up with these developments and hence businessmen had to think of newer form of
business ownership which resulted in company form of organisation.
Meaning of Company:
The
Companies Act, 1956 defines a company as ‘a company formed and registered under
this Act or an existing company. This statutory definition is not very
revealing in so far as the characteristics of a company are concerned.
A
more comprehensive definition is that a company is an “artificial person
recognized by law with a distinctive name, a common seal, capital comprising of
transferable shares, carrying limited liability and having a perpectual
succession”.
CHARACTERISTICS:
1.
Legal
entity:
Every company has a separate legal entity apart from its members. It is
a artificial person and enjoys certain rights and privileges of a natural
person.
2.
Limited
liability:
The liability of each shareholder is
limited to the amount unpaid on their shares irrespective of quantum of loss.
3.
Transferability
of shares:
The capital of the company is divided into parts called shares. These
share are transferable.
4.
Perpectual
succession:
A company has a continued existence its continuity is not affected by
death, in solvency or exit of any shareholder. The common saying in this regard
is “members may come, members may go, but the company goes on forever”. Law
creates it and law alone can dissolve it.
5.
Separate
ownership and management:
The management of a company is entrusted with the representatives of
the shareholders namely board of directors. Hence, ownership and management are
separate.
6.
Common
seal:
Every company has a common seal which is used as an emblem on all legal
documents. Since the company is an artificial person the seal is used as the
signature of the company to sign any document.
7.
Separate
property:
A company, being a legal person, is capable of acquiring owing and
disposing of property in its own name. it has the right to entre into contracts
in its own name.
8.
Capacity
to sue:
Being
a legal person and enjoying distinct entity, a company is fully competent to
sue others and be sued by others.
KIND OF COMPANIES:
CHARTERED COMPANIES:
These
companies were formed in the 19th century under a special charter
granted by the King or Queen of England India
STATUTORY COMPANIES:
These
companies are created by a special Act of the legislature – central or state.
Such companies are governed by the provisions of their respective Acts.
Example: Reserve Bank of India
REGISTERED COMPANIES:
Private Company
A private company is one which by its
articles
a.
Restricts
the right of its members to transfer their shares.
b.
Limits
the number of its members to fifty.
c.
Prohibits
any invitation to the public to subscribe for any shares in or debentures of
the company.
Public Company:
A
public company means a company which is not a private company.
Companies limited by shares:
A
company in which the liability of each member is limited upto the face value of
shares held by him is known as a company limited by shares.
Companies limited by guarantee:
These
companies are usually formed to set up non-trading organizations like schools,
hospitals charitable institutions, etc. The liability of each member in such a
company is limited to the amount he has guaranteed to contribute in the event
of the winding up of the company.
Unlimited Companies:
These
companies may or may not be registered with a share capital. But the liability
of members of these companies is unlimited. Such companies are rarely formed
now-a- days.
Government companies:
A
registered company in which not less than 51 per cent of the paid-up share
capital is held by a Central Government or by a State Government or jointly by
the Central and State Government is known as a Government company.
Foreign companies:
A
company which is incorporate outside India
and has established a place business in India
Holding and subsidiary companies:
A
company which controls, the composition of the Board of Directors of another
company or holds the majority of the equity shares of another company, is known
as a holding company. The other company which is to controlled is known as a
subsidiary company.
Advantages and limitations of Company form
of organisation
Advantages:
1.
Huge
financial resources:
The biggest advantage is that the company is able to
collect huge financial resources from the public by issue of shares and
debentures. There is virtually no limit on the member of persons who can become
the members of the public company.
2.
Limited
liability:
The members are not liable to pay anything more than
the face value of the shares of the company to cover business debts in the
event of failure of the company. This limited liability is the another biggest
advantage.
3.
Easy
transfer of ownership:
The company permits its members to easily transfer
their shares and hence the owners of shares need not commit that resources for
the entire life of the company.
4.
Stability
The company enjoys perpetual existence and stability.
The feature permits it to undertake projects of long duration and offers a
greater attraction to the investors to put their resources in the business.
5.
Greater
scope for growth and expansion:
The company form affords enormous possibilities of
growth and expansion. Since business is conducted on a large scale, it brings
the economies of scale especially in the field of production, marketing and
finance.
6.
Efficient
management:
The company, because of its larger size and
greater resources are able to employ people with exceptional abilities and
competency. This helps to manage the organisation effectively and efficiently.
7.
Public
confidence:
A company organisation enjoys confidence
and trust of general public because its activities are made open to public
through accounts and annual reports. This public confidence helps a company to
raise additional capital, to market its products easily and to undertake growth
and expansion programmes.
8.
Democratization
of ownership:
This form gives scope for large number of
people to become members and they elect their representatives to manage the
company. Hence, the ownership is democratized in this form.
DISADVANTAGE:
1.
Difficult
to form:
To form the company, several legal
formalities are to be observed. The cost of formation is also quite high.
2.
Lack
of incentive:
This actual management of the company is
not in the hands of shareholders but it is entrusted to the directors and
salaried officials. One cannot expect the officials to take care of the company
with as much interest and enthusiasm as the proprietors.
3.
Delay
in taking decisions:
Decisions are not taken by one person but
through the Board or Directors and till the Board meets, decisions have to be
delayed and consequently implementation is also delayed.
4.
High
cost of administration:
In the company form of organisation, the
cost of management and administration is very high.
5.
Conflict
of interest:
A Company organisation witnesses
conflicting interests among those who deal with it such as equity shareholders
and preference shareholders, directors and shareholders, managers and workers
etc.
6.
Oligarchic
management:
In lew, the company management may seem to
be fully democratic but in practice it is mostly a case oligarchic (controlled
by a small group of directors).
The advantages of the company form of
organisation outweigh its limitations. Despite its weaknesses this form of
organisation is best suited to large sized business activities which require
huge capital outlay and maximum stability.
