CHAPTER ONE DEFINITION AND NATURE OF COMPANY 1. Definition of a company The word ‘company’ is derive from the Latin word (com= with or together; panis=bread) and its originally referred to an association of person who took their meals together. In common parlance, a company means an association of like minded person formed for the purpose of carrying on some business or undertaking.

In its legal meaning, a company is an incorporated body that is an artificial person created by law having separate legal entity with perpetual and a common seal. It is also called “corporate body” because the persons composing it are made into one body by incorporating it according to the law and clothing it legal personality.

2. CHARACTERISTICS OF COMPANY a 2. CHARACTERISTICS OF COMPANY a. Artificial legal person A company is the creation of law which an artificial person clothed with many rights and obligation, powers and duties prescribed by law. Being creation of law, it possesses only the properties conferred upon it by memorandum of association. Within the limits of powers conferred by the charter; it can do all acts as a natural person may do.

b. separate legal entity By incorporating under the law, the company becomes a separate legal entity from individuals who are its members. Being a separate legal entity, it bears its own name and acts under a corporate name. Its members are its owners but they cannot held liable for the acts of the company and they are not the agents of the company and cannot bind it by their acts.

C. Perpetual succession An incorporated company never dies except when it is wound up under the law. Being separate legal person, its not effected by the death or departure of any member and remains the same entity despite total change in the membership. Perpetual succession denotes the ability of the company to maintain its existence by the constant succession of new individuals who step into the shoes of those who cease to be members of the company.

d. Common seal On incorporation, a company acquires a common seal since the company has no physical existence. It acts through its agents and all such contracts entered into by its agents must be under the seal of the company. The name of the company must be engraved on its common seal. A document not bearing common seal of the company is not authentic and has no legal force behind it. The common seal acts as the official signature of a company.

e. Limited liability A company may be company limited by shares or a company limited by guarantee. In company limited by shares, the liability of members is limited to the unpaid value of the shares . In a company limited by guarantee the liability of members is limited to such amount as the member may undertake to contribute to the assets of the company in the event of its being wound up.

f. Transferability of shares The capital of a company is divided into parts called shares. These shares are movable property and subject to certain conditions, freely transferable because no shareholder is permanently or necessarily wedded to a company. A member may sell his shares in the open market and realise the money invested by him. This provides liquidity to a member (as he can freely sell his share) and ensures stability of to the company(as the member is not withdrawing his money from the company).

g. Capacity to sue and being sued A company being a body corporate can sue and be sued in its own name. To sue means to institute legal proceedings against a person. All legal proceeding against the company are to be instituted in its own name. h. separation of ownership and management A joint stock company is an autonomous, self governing and self-controlling organization. Since it has a large number of members, all of them cannot take part in the management of the affairs of the company.

Actual control and management is, therefore, delegated by the shareholders to their elected representatives, know as directors. i. Separate property. A company, being a legal person and entirely distinct from its members, is capable of owning, enjoying, and disposing of property in its own name. the company is the real person in which all its property is vested, and by which it is controlled, managed and dispose off.

3. LIFTING THE CORPORATE VEIL By the provision of law, a corporation is clothed with a distinct personality, yet in reality it is an association of persons who are in fact, in a away, the beneficial owner of the property of the body corporate. The theory of corporate body is the basic principle on which the whole law of corporation is based and it’s a statutory privilege which must be used for legitimate business purpose only. When legal entity is misused for illegal activities; the members should not take shelter behind the corporate principle.

Lifting the corporate veil of company is a doctrine which is used to identify of a company with its members where the corporate veil is lifted and individual members may be held liable for their acts. Lifting corporate veil can be done through Judicial interpretation or law .

Reasons for Lifting the Veil of the Corporates are: Prevention of fraud or improper conduct; Where the company is acting as agent of the shareholder; and Protecting public policy. Number of the members below statutory minimum

4. ADVANTAGES OF INCORPORATION Limited liability; Transferability of shares; Separate legal entity; Permanent existence; Separation of ownership and management; Experts of management; Public confidence; and Social advantage.

5. DISADVANTAGES OF INCORPORATION Complicated procedure and cost; Publicity; Administration; The doctrine of ultra vires; Taxation; Delay in starting business; and Winding up.

DIFFERENCE BETWEEN COMPANY AND PARTNERSHIP Mode of Creation By registration or By Special Law By Agreement Legal Status Separate entity No separate entity Liability Limited Liability No Limited Liability Management Separation between Management and Ownership No separation between management and ownership Transfer of share Free transferable shares Restriction on the right transferability of the shares Number of Members Minimum for public company is seven without limited maximum. Minimum for private company is 2 and maximum is 50. Minimum is 2 and maximum is 20.

Can be dissolve only in accordance with regulating law. Company Partnership General Powers Memorandum defines and confines the scope of company’s business and its difficult to alter it. Partnership agreement defines the business and easy to alter it. Legal formalities Statutory books, Registration, auditing, filing in accordance with company law There is no such legal formalities. Dissolution Can be dissolve only in accordance with regulating law. Can be dissolved by agreement, by Court or by the death of a partner.

End Of the Chapter Questions and Comments are Open and Welcomed.