Table of Contents
What is a Company?
A company may be defined as a voluntary association of persons, recognized by law, having a distinctive name, a common seal formed to carry on, business for profit with capital divisible into transferable shares, limited liability, a corporate body, and perpetual succession.
Understanding these advantages and disadvantages of a company will help you steer your business in the right direction.
Features of Company
These are some important features of company:
- Separate Legal Entity
- Artificial Legal Person
- Perpetual Succession
- Limited Liability
- Common Seal
- Transferability of Shares
- Separation of Ownership and Management
- Incorporated Association of Persons
Separate Legal Entity
A company has an existence entirely distinct from and independent of its members. It can own property and enter into contracts in its own name. It can sue and be sued in its own name. There can be contracts and suits between a company and the individual members who compose it.
The assets and liabilities of the company are not the assets and liabilities of the individual numbers and vice versa. No member can directly claim any ownership right in the assets of the company,
Artificial Legal Person
A company is an artificial person created by law and existing only in contemplation of law. It is intangible and invisible having no body and no soul. It is an artificial person because it does not come into existence through natural birth and it does not possess the physical attributes of a natural person.
Like a natural person, it has rights and obligations in terms of law. But it cannot do those acts that only a natural person can do, e.g., taking an oath in person, enjoying married life, going to jail, practicing the profession, etc. A company is not a citizen as it enjoys no franchise or other fundamental rights.
Perpetual Succession
A company enjoys continuous or uninterrupted existence and its life is not affected by the death, insolvency, lunacy, etc. of its members, or directors. Members may come and go but the company survives so long as it is not wound up.
Being a creature of law, a company can be dissolved only through the legal process of winding up. It is like a river that retains its identity though the parts composing it continuously change.
Limited Liability
Liability of the members of a limited company is limited to the value of the shares subscribed to or to the amount of a guarantee given by them. Unlimited companies are an exception rather than the general rule.
In a limited company, members cannot be asked to pay anything more than what is due or unpaid on the shares held by them even if the assets of the company are insufficient to satisfy in full the claims of its creditors.
Common Seal
A company being an artificial person cannot sign for itself. Therefore, the law provides for the use of a common seal as a substitute for its signature.
The common seal with the name of the company engraved on it serves as a token of the company’s approval of documents. Any document bearing the common seal of the company and duly witnessed (signed) by at least two directors is legally binding on the company.
The shares of a public limited company are freely transferable. They can be purchased and sold through the stock exchange. Every member is free to transfer his shares to anyone without the consent of other members.
Separation of Ownership and Management
The number of members in a public company is generally very large so all of them or most of them cannot take an active part in the day-to-day management of the company.
Therefore, they elect their representatives, known as directors, to manage the company on their behalf. Representative control is thus an important feature of a company.
Incorporated Association of Persons
A company is an incorporated or registered association of persons. One person cannot constitute a company under the law. In a public company, at least seven persons and in a private company at least two persons are required.
Advantages of Company
The company form of business ownership has become very popular in the modem business on account of its several advantages:
- Limited Liability
- Large Financial Resources
- Continuity
- Transferability of Shares
- Professional Management
- Scope for Growth and Expansion
- Public Confidence
- Diffused Risk
- Social Benefits
Limited Liability
Shareholders of a company are liable only to the extent of the face value of shares held by them. Their private property cannot be attached to pay the debts of the company. Thus, the risk is limited and known. This encourages people to invest their money in corporate securities and, therefore, contributes to the growth of the company’s form of ownership.
Large Financial Resources
Company form of ownership enables the collection of huge financial resources. The capital of a company is divided into shares of small denominations so that people with small means can also buy them.
The benefits of limited liability and transferability of shares attract investors. Different types of securities may be issued to attract various types of investors. There is no limit on the number of members in a public company.
Continuity
A company enjoys uninterrupted business life. As a body corporate, it continues to exist even if all its members die or desert it. On account of its stable nature, a company is best suited for such types of business which require long periods of time to mature and develop.
A member of a public limited company can freely transfer his shares without the consent of other members. Shares of public companies are generally listed on a stock exchange so that people can easily buy and sell them.
The facility of transfer of shares makes investment in the company liquid and encourages investment of public savings into the corporate sector.
Professional Management
Due to its large financial resources and continuity, a company can avail of the services of expert professional managers.
Employment of professional managers having managerial skills and little financial stake results in higher efficiency and more adventurous management. The benefits of specialization and bold management can be secured.
Scope for Growth and Expansion
There is considerable scope for the expansion of business in a company. On account of its vast financial and managerial resources and limited liability, the company form has immense potential for growth.
With continuous expansion and growth, a company can reap various economies of large-scale operations, which help to improve efficiency and reduce costs.
Public Confidence
A public company enjoys the confidence of the public because its activities are regulated by the Government under the Companies Act. Its affairs are known to the public through the publication of accounts and reports. It can always keep itself in tune with the needs and aspirations of people through continuous research and development.
Diffused Risk
The risk of loss in a company is spread over a large number of members. Therefore, the risk of an individual investor is reduced.
The company organization helps to mobilize the savings of the community and invest them in industry. It facilitates the growth of financial institutions and provides employment to a large number of persons. It provides huge revenues to the Government through direct and indirect taxes.
Disadvantages of Company
Let’s delve into the disadvantages of a company and explore how they may impact your entrepreneurial journey:
- Difficulty of Formation
- Excessive Government Control
- Lack of Motivation and Personal Touch
- Oligarchic Management
- Delay in Decisions
- Conflict of Interests
- Frauds in Promotion and Management
- Lack of Secrecy
- Disadvantageous from a Social Point of View
Difficulty of Formation
It is very difficult and expensive to form a company. A number of documents have to be prepared and filed with the Registrar of Companies. The services of experts are required to prepare these documents.
It is very time-consuming and inconvenient to obtain approvals and sanctions from different authorities for the establishment of a company. The time and cost involved in fulfilling legal formalities discourage many people from adopting the company form of ownership. It is also difficult to wind up a company.
Excessive Government Control
A company is subject to elaborate statutory regulations in its day-to-day operations. It has to submit periodical reports. Audit and publication of accounts are obligatory. The objects and capital of the company can be changed only after fulfilling the prescribed legal formalities.
These rules and regulations reduce the efficiency and flexibility of operations. A lot of precious time, effort, and money has to be spent in complying with the innumerable legal formalities and irksome statutory regulations.
Lack of Motivation and Personal Touch
There is a divorce between ownership and management in a large public company. The affairs of the company are managed by professional and salaried managers who do not have personal involvement and stake in the company.
Absentee ownership and impersonal management result in a lack of initiative and responsibility. Incentives for hard work and efficiency are low. Personal contact with employees and customers is not possible.
Oligarchic Management
In theory, the management of a company is supposed to be democratic but in actual practice, the company becomes an oligarchy (ruled by a few). A company is managed by a small number of people who are able to perpetuate their reign year after year due to a lack of interest, information, and unity on the part of shareholders.
The interests of small and minority shareholders are not well protected. They never get representation on the Board of Directors and feel oppressed.
Delay in Decisions
Too many levels of management in a company result in red tape and bureaucracy. A lot of time is wasted in calling and holding meetings and in passing resolutions. It becomes difficult to make quick decisions and prompt action with the consequence that business opportunities may be lost.
Conflict of Interests
A company is the only form of business wherein a permanent conflict of interests may exist. In a proprietorship there is no scope for conflict and in a partnership continuous conflict results in the dissolution of the firm.
But in a company conflict may continue between shareholders and the board of directors or between shareholders and creditors or between management and workers.
Frauds in Promotion and Management
There is a possibility that unscrupulous promoters may float the company to dupe innocent and ignorant investors. They may collect huge sums of money and, later on, misappropriate the money for their personal benefit. The case of South Sea Bubble Company is the leading example of such malpractices by promoters.
Moreover, the directors of a company may manipulate the prices of the company’s shares and debentures on the stock exchange on the basis of inside information and accounting manipulations. This may result in reckless speculation in shares and even a sound company may be put into financial difficulties.
Lack of Secrecy
Under the Companies Act, a company is required to disclose and publish a variety of information on its work. Widespread publicity of affairs makes it almost impossible for the company to retain its business secrets. The accounts of a public company are open for inspection by the public.
From a social point of view, a company form of organization is considered undesirable for the following reasons:
- The joint stock companies tend to form combinations exercising monopolistic powers against the consumers of their products and small products in the same line.
- A company tends to concentrate economic power in a few hands.
- A company encourages reckless speculation in shares on the stock exchange. Due to this, prices of its shares fluctuate artificially which goes against the interests of the company and discourages fresh investment in companies.
- A company makes possible oligarchic management of its affairs. The oligarchy is harmful to the legal body of shareholders.
FAQs Section
What are the features of company?
The features of the company are;
1. Separate Legal Entity
2. Artificial Legal Person
3. Perpetual Succession
4. Limited Liability
5. Common Seal
6. Transferability of Shares
7. Separation of Ownership and Management
8. Incorporated Association of Persons.
What are the advantages of company?
The advantages of a company are Limited Liability, Large Financial Resources, Continuity, Transferability of Shares, Professional Management, etc.
What are the disadvantages of company?
The disadvantages of a company are Difficulty of Formation, Excessive Government Control, Lack of Motivation and Personal Touch, Oligarchic Management, Delay in Decisions, etc.
