Company Law Fundamentals: Structure, Formation, and Capital

Posted on Jun 13, 2025 in Law & Jurisprudence

Understanding Companies: Definitions and Features

Definition of a Company

A company is a legal entity separate from its members, created by law, with its own rights, duties, and liabilities. It is a business organization formed to carry out specific activities as defined in its charter. Companies have the ability to own property, incur liabilities, and engage in business transactions in their own name.

• According to Section 2(20) of the Companies Act, 2013, “Company means a company incorporated under this Act or under any previous company law.”
• Professor Haney defines a company as “an artificial person created by law, having separate legal entity, with a perpetual succession and a common seal.”

Key Features of a Company

• Incorporated Association: A company must be registered under the Companies Act. Without registration, it has no legal existence.
• Artificial Legal Person: A company is created by law and enjoys legal rights like a natural person. It can own property, enter into contracts, and sue or be sued in its own name.
• Separate Legal Entity: The company’s existence is separate from its members. It can own assets and incur liabilities independently of its shareholders.
• Limited Liability: The liability of the shareholders is limited to the extent of the amount unpaid on their shares. Their personal assets are not used to pay company debts.
• Perpetual Succession: The existence of a company is not affected by the death, insolvency, or insanity of any of its members. It continues to exist until it is legally dissolved.
• Common Seal (Optional): Earlier, a company was required to have a common seal as its official signature. Now, under the Companies Act, 2013, it is optional but still used by many companies.
• Transferability of Shares: In a public company, shares are freely transferable. In private companies, there are some restrictions on the transfer of shares.
• Separation of Ownership and Management: The shareholders are the owners, but the company is managed by a board of directors elected by shareholders.
• Capacity to Sue and Be Sued: A company can take legal action in its own name and can also be sued by others.
• Raising Capital: Companies have a better opportunity to raise large amounts of capital by issuing shares and debentures to the public.

Types of Companies

• Private Company: A private company is limited by shares or guarantee and restricts the right to transfer its shares, limits the number of members to 200, and prohibits public share offerings. Example: Small family-owned businesses or startups.
• Public Company: A public company can raise capital from the public by issuing shares or debentures. There is no limit on the number of members. Example: Large corporations listed on stock exchanges.
• One Person Company (OPC): A company that can be formed with just one member. This structure is available only to a natural person and provides the benefits of limited liability while being a single member. Example: Freelance professionals or consultants.
• Non-Profit Company: Formed for charitable or public utility purposes. It cannot distribute profits to its members. Example: NGOs or social enterprises.
• Holding and Subsidiary Companies: A holding company controls the policies and decisions of another company (subsidiary) by holding a majority of its shares. Example: Multinational corporations with several subsidiaries across countries.
• Government Company: A company in which the government holds at least 51% of the paid-up share capital. Example: Indian Oil Corporation, Bharat Heavy Electricals Limited (BHEL).
• Foreign Company: A company incorporated outside the country but has business operations within the country. Example: A subsidiary or branch of a foreign corporation operating in India.

Private Company: Definition and Characteristics

Definition of a Private Company

As per Section 2(68) of the Companies Act, 2013, “Private company means a company having a minimum paid-up share capital as may be prescribed, and which by its Articles — (i) restricts the right to transfer its shares; (ii) limits the number of its members to two hundred; and (iii) prohibits any invitation to the public to subscribe for any securities of the company.”

Key Characteristics of a Private Company

• Minimum 2 members and maximum 200 members.
• Restriction on the transfer of shares.
• Cannot invite the public to subscribe to shares or debentures.
• Minimum 2 directors required.

Company Formation: Stages and Promoters

Role and Responsibilities of a Promoter

Meaning of a Promoter

A promoter is an individual or group of individuals who conceive the idea of forming a company and take the necessary steps to bring the company into existence. The promoter undertakes activities like discovering business opportunities, arranging capital, and preparing foundational documents such as the Memorandum of Association (MOA) and Articles of Association (AOA).

Duties of a Promoter

• Duty of Disclosure: The promoter must disclose any profits he/she earns from transactions related to the company.
• Duty to Avoid Secret Profit: The promoter must not make secret profits at the cost of the company. Any profit made must be disclosed.
• Duty of Good Faith: The promoter must act in the best interest of the proposed company.
• Duty to Ensure Fair Dealings: All contracts entered on behalf of the company must be fair and without any conflict of interest.
• Duty to Disclose Personal Interests: The promoter must disclose any interest he has in transactions involving the company.

Liabilities of a Promoter

• Liability for Misrepresentation: If a promoter misrepresents facts to investors or the public, he can be held liable for damages.
• Liability for Breach of Fiduciary Duty: If the promoter breaches trust or acts against the interests of the company, he is personally liable.
• Liability Under Companies Act: The Companies Act imposes certain obligations, such as providing truthful statements in the prospectus. False statements can result in legal action.
• Personal Liability Before Incorporation: Contracts entered into by promoters before the company’s incorporation are personally binding on them unless specifically adopted by the company later.
• Criminal Liability: In cases involving fraud, promoters may face criminal charges under applicable laws.

Stages in Company Formation

1. Promotion Stage

This is the first stage where the idea of forming a company is conceived. Promoters take the initiative by conducting feasibility studies and arranging financial and managerial resources. They also decide the company’s name, location of office, and objectives. The promoter drafts the Memorandum and Articles of Association and appoints legal advisors and other professionals.

2. Incorporation Stage

• Preparation of Documents: Essential documents like the Memorandum of Association (MOA), Articles of Association (AOA), and other required forms are prepared.
• Name Approval: An application is made to the Registrar of Companies (ROC) for approval of the company’s name.
• Filing with ROC: After name approval, documents are filed with the ROC along with prescribed fees.
• Issue of Certificate of Incorporation: Once the ROC is satisfied, the Certificate of Incorporation is issued, signifying the legal birth of the company.

3. Post-Incorporation Formalities

• PAN and TAN Registration: The company must obtain the PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account Number).
• Bank Account Opening: A company bank account is opened to handle the company’s finances.
• Other Declarations: File necessary declarations regarding the commencement of business (if applicable).

4. Commencement of Business

For a private company, commencement of business requires filing a declaration that every subscriber to the Memorandum has paid the value of shares agreed. No Certificate of Commencement of Business is separately required after the Companies (Amendment) Ordinance, 2019, but the declaration under Section 10A is mandatory.

Memorandum and Articles of Association

Memorandum of Association (MOA)

Definition of MOA

The Memorandum of Association is a legal document that sets out the constitution of a company. It defines the scope of a company’s activities and its relationship with the outside world. It is considered the “charter” of the company.

Contents of MOA

• Name Clause: Specifies the name of the company.
• Registered Office Clause: States the location of the company’s registered office.
• Object Clause: Defines the main objectives and business activities of the company.
• Liability Clause: States the liability of the members (e.g., limited by shares or guarantee).
• Capital Clause: Specifies the authorized share capital of the company.
• Subscription Clause: Contains the names and signatures of the subscribers to the memorandum.

Articles of Association (AOA)

Definition of AOA

According to Section 2(5) of the Companies Act, 2013, “Articles means the Articles of Association of a company as originally framed or as altered from time to time.” It is a document that defines the internal rules and regulations governing the management of a company.

Importance of AOA

• It acts like a rulebook for the company’s internal affairs.
• Binds the company and its members.
• Helps in smooth administration and decision-making.

Contents of AOA

• Share Capital: Types and classes of shares, rights attached to different classes of shares, and procedures for issuing new shares.
• Transfer and Transmission of Shares: Rules regarding how shares can be transferred or passed to heirs in case of death.
• Alteration of Share Capital: Procedures to increase or decrease share capital, consolidate or subdivide shares.
• Borrowing Powers: Authorization to borrow money and conditions for taking loans.
• Meetings and Proceedings: Rules for holding Board meetings, General Meetings, and passing resolutions.
• Voting Rights: Provisions about voting rights of members, proxies, and quorum requirements.
• Appointment and Powers of Directors: Methods of appointing directors, their duties, powers, and remuneration.
• Dividends and Reserves: Declaration and distribution of dividends, creation of reserves.
• Accounts and Audit: Maintenance of company books and appointment of auditors.

Distinction Between MOA and AOA

Share Capital and Calls on Shares

Definition of Share Capital

Share capital refers to the amount of money a company raises by issuing shares to its shareholders. It represents the funds invested by the owners or shareholders of the company.

• According to Section 2(84) of the Companies Act, 2013, “Share Capital means the capital raised by a company by issue of shares.”

Types and Structure of Share Capital

• Authorized Capital: The maximum capital that a company is authorized to raise through share issues as stated in its Memorandum of Association. It can be increased with the approval of shareholders and ROC.
• Issued Capital: The part of authorized capital that is offered to investors through the issuance of shares.
• Subscribed Capital: The part of issued capital which has been subscribed (accepted) by investors. It shows the amount of shares actually taken by the public.
• Called-Up Capital: The portion of subscribed capital that the company has called upon shareholders to pay.
• Paid-Up Capital: The amount of called-up capital that shareholders have actually paid. Paid-up capital represents the real amount received by the company.
• Reserve Capital: A portion of the uncalled capital which a company decides to keep reserved to call up only at the time of winding up.
• Equity Share Capital: Represents ownership in the company. Holders enjoy voting rights and share profits through dividends. Riskier but can provide higher returns.
• Preference Share Capital: Holders get preference in payment of dividend and return of capital at the time of winding up. Dividends are generally fixed.

Calls on Shares

Meaning of Call on Shares

A “call” on shares refers to a demand made by a company on its shareholders to pay all or part of the unpaid balance on their shares as per the terms of issue. Companies usually call for payment in installments after the application and allotment stages.

Legal Procedure for Making a Call on Shares

• Authority in Articles of Association: The Articles of Association must authorize the board of directors to make calls.
• Board Resolution: A board meeting must be convened to pass a resolution for making the call. The resolution must specify the amount of call, the due date for payment, and the place and mode of payment.
• Notice to Shareholders: A written notice must be sent to all shareholders specifying the amount to be paid, the due date, and the consequences of non-payment (like forfeiture of shares).
• Time Gap Between Calls: There should be a reasonable gap between two calls.
• Uniformity: Calls must be made uniformly on all shares of the same class.
• Payment Collection: Payments must be collected as per the notice and recorded properly.
• Non-payment Consequences: If a shareholder fails to pay the call amount, the company may initiate forfeiture of the shares following the procedure given in the Articles.

Legal Provisions and Regulations

• According to the Companies Act, the company must have the authority to make calls in the Articles of Association.
• A company cannot make a call unless the share capital is partially paid.
• If a shareholder fails to pay the amount due, the company may forfeit the shares.
• Minimum Calls: A company can make calls as it deems fit, but the amount cannot exceed the nominal value of the share.
• Forfeiture: If calls are not paid, shares can be forfeited under the provisions of the Companies Act and AOA.