(a) Give the meaning of 'Company' form of business organisation. Explain the following features of a company:
(i) Separate Legal Entity (ii) Limited Liability (iii) Transferability of Shares (iv) Diffusion of Ownership and Management

Question

(a) Give the meaning of 'Company' form of business organisation. Explain the following features of a company:

(i) Separate Legal Entity (ii) Limited Liability (iii) Transferability of Shares (iv) Diffusion of Ownership and Management

Accepted Answer

A company is a voluntary association of persons formed for some common object, with capital divisible into units of equal value called shares and with limited liability. It is a creation of law — an artificial person — and can only be terminated by law.

(i) Separate Legal Entity — A company has an independent status, separate and distinct from its members. It is not liable for the actions of its members and vice-versa. It can own property, enter into contracts and conduct business in its own name.

(ii) Limited Liability — The liability of shareholders is normally limited to the extent of the amount of shares held by them or the guarantee given by them. Their personal assets are not at stake beyond the amount of their investment in the company.

(iii) Transferability of Shares — Shares of a company are freely transferable, subject to certain conditions. A shareholder can easily sell his shares to others, which gives liquidity to the investment; private companies may, however, restrict the transfer of shares.

(iv) Diffusion of Ownership and Management — There is separation of ownership from management. Ownership rests with the shareholders, while management is delegated to the board of directors; the shareholders give the directors the right to manage the company on their behalf.