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Lecture notes

Topic 3 Company Accounts

Company is an artificial person being created by the law that has an existence
separate and apart from its owners. In other words a company is an artificial person
created by law, with a distinctive name, a common seal and perpetual succession of
member. It can sue and be sued in its own name.
Let us consider a few more definitions of company.
The Indian companies Act, 1956 defines a joint stock company as company limited
by shares having a permanent paid up or nominal share capital of fixed amount
divide into shares also of fixed amount held and transferrable as stock and formed
on the principles of having in its members only the holder of those shares or stocks
and no other persons.
One most widely quoted definition of a company (called corporation in USA) is given
by chief justice marshal in these words A corporation is an artificial being indivisible
intangible and existing only in contemplation of law being the mere creature of law,
it possesses only those properties which the charter of tits creation confers upon it

expressly or an incidental to its very existence.

Lord justice Linley has defined a company as an association of many persons, who
contribute money or moneys worth to a common stock and employ it for a common
purpose. The common stock so contributed is denoted in money and is the capital of
the company The persons who contributed is denoted in money and is the capital
of the company .The persons who contributed is denoted in money and is the capital
of the company .the person who contribute it or to whom it belongs are members
the proportion of capital to which each member is entitled is his share.

In brief a company can be defined as an artificial (legal) person with its independent
legal entity.
Main features.
Based on the above definite, given below are the main features of company form of

Artificial legal person, A company is a n artificial person created by law

.Though it has no body o conscience still it exists as a person like a person it
can enter into contracts in its own name and likewise may use and be sued in
its own name.

Separate legal Entity, A company has a district entity separate form it

members or shareholder .therefore, a shareholder of the company can enter
in to contract with the company .He /she can sue the company and be sided
by company.

Common seal, Being an artificial person company cannot sign the documents
hence it uses a common seal on which its name is engraved putting the
common seal on papers

relating to companys transactions makes them

binding the company.

Perpetual Existence, Unlike partnership the existence of a company is not

affected by the death lunacy insolvency or retirement of its members or
directors .this is because the company enjoys a separate legal existence from
that of it s members it is did member may come, members may go but the
company goes for ever it is created by law and is dissolved by law itself.

Limited liability the liability of the members of a company is normally limited

to the amount of shares held or guarantee given by them.

Transferability of share the member of a public limited company can sell his
share as to other without the consent of other shareholders yes he has to
flow the procedure laid down in the companies Act for transferring his shares
to others in case of a private limited company.

Separation of Ownership form Management, The shareholders ie, owner

being scattered all over country give right the directors to manage the affairs
of the company

the directors are the representatives of the shareholders

thus ownership is separated from management.

Number of members. In case of a public limited company the minimum

number is seven and there is no maximum limit, but for a private limited
company the minimum number of members is two and the maximum number
is fifty.

Private And Public Company.

Private company, under section 3(I) (iii) of the companies Act, a private company
has been defined as a company which by its articles of association.

Restricts the right to transfer the shares if any

Limits of number of it members to fifty and

Prohibits and invitation

to the public to subscribe for the shares of the

debentures of the company.

Public company , under section 3(I) (iii) of the companies Act , a public company is a
company which is not a private company

.By implication, a public company is one

which places no restrictions by its articles of association on the transfer of shares or on

the maximum number of members can invite the public to subscribe for it shares and
debentures and public deposits
The distinctions between a private company and a public company have been detailed
out in a more orderly manner in Table 15.1
Privileges of a private company.
In spite of certain restrictions imposed on a private company, it enjoys certain
privileges under the companies Act .That is why a substantial number of entrepreneurs

prefer to form a private company. Following are the important privileges granted to a
private company.
For forming a private company, not less than two members are required.
A private company is required to have only two directors.
Such company is not required to file prospectus or a statement in lieu of
prospectus with the register of companies.
It can commence its business immediately after incorporation
It is also not required to hold a statutory meeting nor it is require to file a
statutory report.
The directors of a private company are not required to give their consent to act
or to take up their qualification shares prior to their appointment.
A non member cannot inspect the copies of the profit and loss/c filed with to
Registrar of companies.
Limit on payment of maximum managerial remuneration does not apply to a
private company.
Restrictions on appointment and reappointment of managing director do not
apply to such company.
A private company is not required to maintain an index of it membership.

The important among the advantages of company form of ownership are as follows: Limited, the liability of shareholders, unless and otherwise stated is limited to the
face value of shares a held by them or guarantee give by them.
Professional management. In company business, the management is in the

of the directors who are elected by the share holders and are will

experienced persons

in order to manage the day to day activities salaried

professional managers reappointed thus the company , expansion of business is

easy by issuing

new shares and

debentures companies normally use their

reserves for expansion purposes.

Expansion potential: As there is no limit to the maximum number of shareholders
in a public limited company expansion of business IS easy by issuing new share
so debentures .Companies normally use their reserves for expansion purposes.
Transferability shares, If the shareholders of a company are displeased with the
progress of the business they can sell their shares anytime. During

all this

change of ownership the business continues to operate

Diffusion of Risk; as the membership is very large the whole business risk s
divided among the several members of the company .This is a advantage
particularly for small investors.
In spite of its several advantages the company form of ownership has also some
disadvantages the important amount disadvantages are; Lack of secrecy, As per the legal provisions a company has to make various
statements available to the Registrar to the companys financial institution , the
secrecy of business comes

down it is further reduced when the com[any

provides its annual report to the shareholders as the competitors do also find
out the details of all financial data.
Legal Restrictions ,Compared to proprietorship and partnership , a company has
to comply with more legal requirements it claims considerable time and effort.
Management Mischiefs, sometimes the managers and directors

misuse the

company resources for their personal benefits .this bring losses to the company
and company is closed.
Lack of personal interest, unlike proprietorship and

partnership the day to day

affairs of a company are looked after by salaried managers since they are the

not the owners they do have hardly

any personal interest and

commitment in the company .This may result in inefficiency and in turn losses.