Company, and choosing a form

A company is an association of persons formed to carry on business, with its capital divided into shares. It is created by law (the Companies Act, 2013) and is an artificial person: it cannot be seen or touched, yet the law treats it like a person. It has:

• a separate legal entity: it owns property, makes contracts, and can sue and be sued in its own name;
• perpetual succession: it is created by law and ends only by law, so members coming and going does not end it;
• a common seal, the company's official signature on documents (now optional);
• limited liability: members are liable only up to the unpaid amount on their shares;
• control by a board of directors, elected by the shareholders.

An example of limited liability: Akshay holds 2,000 shares of ₹10 each, of which ₹7 per share is paid. If the company cannot pay its debts, he can be asked for the unpaid ₹3 × 2,000 = ₹6,000, and no more. His home and savings are safe.

Merits: limited liability; transfer of interest (in a public company, shares can easily be sold); perpetual existence; scope for expansion, as large capital can be raised from many people; and professional management, as it can afford to hire experts.

Limitations: complexity in formation (many legal steps); lack of secrecy (accounts must be published); impersonal work environment (buyers of a big brand never meet its owners); many regulations; delay in decision-making, because decisions pass through many levels; oligarchic management ('rule by a few'), as a few directors control a company with thousands of shareholders; and conflict of interest between owners and managers.

Private and public companies:

• A private company has 2 to 200 members, restricts the transfer of its shares, cannot invite the public to buy its shares, needs at least two directors, and its name ends with 'Private Limited'. (A one person company has only one member.)
• A public company needs at least 7 members (no upper limit), at least three directors, can invite the public to buy its shares, and its shares are freely transferable.

Choosing a form of organisation means weighing: the cost and ease of setting it up; liability (sole proprietor and partners unlimited, company limited); continuity; management ability needed; capital needed; the degree of control the owners want; and the nature of the business. A small shop with personal service suits a sole proprietorship, while a large, risky business that will last for years points towards a company.