Study Material & Notes for the Chapter 8
COMPANY - ACCOUNTING FOR SHARE CAPITAL
Meaning, Features & Type of Companies
I. ISSUE OF SHARE CAPITAL – MEANING, FEATURES AND TYPE OF COMPANIES
A. Company – Definition & Meaning
Definition
- According to Section 2(20) of the Companies Act, 2013, “Company means a company incorporated under this act or any previous Company law.”
Meaning
- A company is an association of persons formed and registered under the Companies Act.
- It is a legal person not having a physical existence.
- It has a separate legal entity which is separate from its members and having share capital into units called shares
- The shareholders contribute towards the capital by buying its shares.
- Shareholders are called owners of a company.
B. Characteristics of a Company
Artificial Legal Person:– A company is an artificial person as it is created by law. It has almost all the rights and powers of a natural person. It can enter into contract. It can sue in its own name and can be sued.
Incorporated Body:– A company must be registered under Companies Act. By virtue of this, it is vested with corporate personality. It has an identity of its own.
Capital Divisible into Shares:– The capital of the company is divided into shares. A share is an indivisible unit of capital. The face value of a share is generally of a small denomination like Rs.5, Rs.10, Rs. 100
Transferability of Shares:– The shares of the company are easily transferable. The shares can be bought and sold in the stock market
Perpetual Existence:– A company has an independent and separate existence distinct from its shareholders. Changes in its membership due to death, insolvency etc. does not affect its existence and its continuity.
Limited Liability:– The liability of the shareholders of a company is limited to the extent of face value of shares held by them. No shareholder can be called upon to pay more than the face value of the shares held by them. At the time of winding up, if necessary, the shareholders may be asked to pay the unpaid value of shares
Representative Management:– The number of shareholders is so large and scattered that they cannot manage the affairs of the company collectively. Therefore they elect some persons among themselves to manage and administer the company. These elected representatives of shareholders are individually called the ‘directors’ of the company and collectively the Board of Directors.
Common Seal:– A common seal is the official signature of the company. Any document bearing the common seal of the company is legally binding on the company.
C. Types of Company – On the basis of Ownership:
Private Company
- restricts the right to transfer its shares, if any.
- except in the case of One Person Company, limits the number of its members excluding its present and past employee members to 200; if the past or present employee acquired the shares while in employment and continue to hold them. If any share is held jointly by two or more persons, they shall be treated as a single member.
- prohibits any invitation to the public to subscribe for any securities of the company. The minimum number of members required to form a private company is two.
The name of a Private Company ends with the words, ‘Private Limited’.
Public Company
- is not a one person company or a private company;
- is a private company, being a subsidiary of a company which is not a private company.
Minimum number of members required to form a public limited company is seven. There is no restriction on maximum number of members.
The name of a public company ends with the word ‘Limited’.
One Person Company
Section 2 (62) of the companies Act, 2013, defines One Person Company as a “company which has only one person as a member”. Rule 3 of the Companies (Incorporation) Rules, 2014 provides that:
- Only a natural person being an Indian citizen and resident in India can form one person company,
- It cannot carry out non-banking financial investment activities.
- Its paid up share capital is not more than Rs. 50 Lakhs
- Its average annual turnover of three years does not exceed Rs. 2 Crores
Distinction between Private & Public Company
Basis | Private Company | Public Company |
Minimum no. of Members | 2 (Two) | 7 (Seven) |
Maximum no. of Members | 200 (Two Hundred) excluding its present or past employee members | No Limit |
Minimum no. of Directors | 2 (Two) | 3 (Three) |
Maximum no. of Directors | 15 (Fifteen) | 15 (Fifteen) |
Name | ‘Private Limited’ is used at the end of the company’s name | ‘Limited’ is used at the end of the company’s name |
Invitation to Public | It cannot invite public to subscribe to its shares | It invites public to subscribe to its shares. |
Transfer of Shares | Articles of Association of the company restrict transfer of shares | Listed Companies–allowed without restriction, Unlisted Companies–restricted by the Articles of Association |
Prospectus | Prospectus is not issued | Prospectus must be issued to invite public to subscribe for shares, if not a Statement in Lieu of Prospectus is filed with Registrar of Companies |
Articles of Association | Special Articles of Association are necessary | Can adopt Table F given in the Companies Act, 2013 or can have its own having different clauses |
Allotment of Shares | Shares may be allotted as the Directors decide. | Listed Companies–Shares can be allotted only if minimum subscription has been received. Unlisted Companies–Shares may be allotted as the Directors decide. |