Note on Company and its Formation

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Meaning and Definition of a Company

A company is an entity created by law and is separated from its owner. A company is a corporate body formed to carry out certain activities for a particular purpose . It is a body formed by the person who contributes capital, who are known as shareholders. The shareholders have a limited liability up to their invested capital. The nature of share is that it is not returnable but transferable from one person to another.

Source: www.pm-consultinggroup.com
Source: www.pm-consultinggroup.com

A company is a voluntary association of a number of individuals, established for some common purpose of economic gain. A company is established by different individuals so that a large scale can be raised for the purpose of mass production.

According to James Stephenson, “A company is an association of many persons who contributes money or money’s worth to common stock and employ it in some trade or business and who share the profits and losses arising thereform."

Nepal Company Act, 2063, “A company refers to any company formed and registered under this Act. “

It is clear from the above definitions that a company is a voluntary association of a group of people willing to carry out a business for which the major part of the capital is collected by selling the shares or debentures to the general public. It is an artificial person, which is created by the specific law with a perpetual succession.

Characteristics of a Company

The main characteristics of a company are as follows:

  • An artificial person: A company is an artificial person created by the law and having a separate existence of its own. Like a real person, it can buy or sell the property in its own name. It can sue and can be sued by others. It can conduct a lawful business and enter into a contract with others.

  • Separate legal entity: A company enjoys a benefit of a separate legal entity from its owners. A company cannot be held liable for the actions of its owners and similarly a shareholder cannot be held liable for the acts of the company.

  • Perpetual succession: A company is created by law and only law can liquidate it. The death, insolvent, inability or lunacy of members does not affect the life of a company. Members may come and members may go, but the company goes on forever.

  • Limited liability: The liability of every owner of a company is limited to the extent of the face value of the shares purchased. Even if, the assets of the company are not sufficient to pay the claims of the creditors, no owners are bound to pay anything more than the face or nominal value of the shares held by them.

  • Transferability of shares: The capital of the company is divided into a number of units which are called shares. These shares are transferable. A shareholder is free to withdraw his membership from the company by transferring shares.

  • Common seal: Being an artificial person, the company cannot sign for itself. It acts through its officers. A common seal is the official signature of a company. All the acts of the company are authorized by its common seal. All the documents are affixed by the common seal for making valid documents.

  • Representative management: There is a separation between ownership and management of a company. Shareholders do not participate directly in the day-to-day management of the company. So, they elect their representatives from among themselves. These representatives manage the company on behalf of the shareholders and they are called directors. The Directors are the legal representatives of the shareholders.

Types of Companies

The various types of companies based on their nature are as follows:

1. On the Basis of Incorporation

On the basis of incorporation, companies can be classified as follows:

  • Chartered Company: A chartered company is established by the Royal Charter or a Special Sanction granted by the head of the state. The East India Company, the Bank of England. etc. are some of the examples of a chartered company. This types of company are no more popular today.
  • Statutory Company: A company which is created by a special act of the parliament and whose objectives, powers and activities are defined by the act is called the statutory company. Nepal Rastra Bank, Agriculture Development Bank. etc. are some of the statutory company.
  • Registered Company: The companies which are formed and registered under the common company law are called registered companies. The working of registered companies is governed by the provision of Company Act. Himal Cement Company, Paper Mills, etc. are some example of registered company.

2. On the Basis of Liability

  • Unlimited Company: It is a company in which the liability of the members is unlimited like that of a partnership firm. If the assets of the company are not sufficient for satisfying the claims of creditors, the shareholders are liable to pay more than the face or nominal value of the share held by them even from their personal property.
  • Company Limited by Shares: A company limited by shares is registered under the provisions of the Company Act with a specific amount of share capital divided into a definite number of shares. The liability of shareholders is limited to the extent of the face value of the shares they have paid for.
  • Company Limited by Guarantee: The Company, under which each shareholder promised to pay a specific sum as a guarantee at the time of winding up of the company, is called a Company Limited by Guarantee. Such guarantee is specified in the Memorandum of Association of the company.

3. On the Basis of the Number of Members

  • Private company: A private company is a company which, by its Memorandum of Association limits the number of its members not exceeding fifty, and prohibits the sale of its share to the general public. A private company must use the word ‘Private Limited (Pvt, Ltd.)’ in its name.

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Privileges of Private Company

  • Private company can be established by a single person.
  • It does not need to publish a prospectus at the time of the issue of its shares.
  • It can refuse the transfer of shares from one member to another.
  • It is not necessary to hold a statutory meeting.

  • Public company: A public company is a company which collects major capital by offering shares to the general public. Its number of membership is governed by the authorized capital with which it is registered. The share is transferable to others. It can sell debentures in markets to raise additional capital as loans. Nepal Bank Ltd, Commercial Bank Ltd., etc, are some examples.

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Advantages of a public company

  • The share is transferable.
  • It is free to invite the public to buy its shares and debentures.
  • A large capital not exceeding the registered capital can be collected for mass production purpose.
  • An effective and efficient management is possible.

4. On the basis of Ownership

  • Government Company: A government company is a company in which no less than 51 percentage of the paid-up share capital is held by the government. Himal Cement Company, Lumbini Sugar Mills are some of the examples of Government.
  • Non-Government Company: The company which is not a government undertaking is called the non-government company. Generally, company owned, managed and controlled by the private sector come under this category. Buddha Airlines, Chaudhary Group, etc. are some examples of non-government companies.

Company Promoters

Company promoters are the people who give birth to a company. Promoters generate the idea and discover business opportunities. They make details investigation about the feasibility of the business, financial source, and competitors. They prepare necessary documents like the Memorandum of Association, the articles of Association and the Prospectus for the incorporation of the company. The promoters may be anyone such as an entrepreneur, a professional promoter, government and financial institution.

Main Documents of a Company

A number of documents should be prepared and presented to the Registrar of Companies in the process of formation of a company. Following document are most essential.

For a Private Limited Company
  1. Memorandum of Association
  2. Articles of Association
For a Public Limited Company
  1. Memorandum of Association
  2. Articles of Association
  3. Prospectus

Memorandum of Association

It is the main document of the company. The document which defines its objectives, power and its relationship with the outside world is called Memorandum of Association. The company works within the framework of the memorandum.

The main contents of Memorandum are as follows:

  • The name of the company
  • The objectives of the company
  • The amount of capital of the company and other.

Article of Association

The document which defines the rights, power, and duties of the management, the modes, and manners of carrying the company’s business, is called the Article of Association. It shows relation between the company’s and its member and relation among member.

According to the Company Act 2063, section 17 (2), the Article of Association contains the following:

  • Number of directors and their term and conditions.
  • The amount of minimum subscriptions by the director.
  • The provision relating to the rule and regulations of internal management.
  • Director’s remuneration and allowance and other.

Prospectus

A prospectus is an invitation to the public to purchase share or debentures of the company. Any circular, advertisement, other or any other document by which a company gives an invitation to the public to subscribe to its shares and debentures is known as a prospectus. According to the Company Act 2063, Prospectus contains the following:

  • The information relating to the management and the objectives of the company.
  • Number of shares to be subscribed by directors and the cash to be received from them.
  • The capital structure of the company dividend into authorized, issue, subscription and paid up share capital.
  • Estimated expenditures for the company and estimated income at least for coming three year and other particulars.

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu

  1. A company is an entity created by law and is separated from its owner. a company is a corporate body formed to carry out to certain activities for a particular purpose.
  2. A company is a voluntary association of a number of individuals, established for some common purpose of economic gain.
  3. A company is an artificial person created by the law and having a separate existence of its own. Like a real person, it can buy or sell the property in its own name.
  4. The companies which are formed and registered under the common company law are called registered companies
  5. A company which is created by a special cat of the parliament and whose objectives, powers and activities are defined by the act is called statutory company.
  6.  A government company is a company in which no less than 51 percentage of the paid-up share capital id held by the government. 
  7. The company which is not a government undertaking is called non-government company.
  8. The document which defines its objectives, power and its relationship with the outside world is called Memorandum of Association. 
  9. A prospectus is an invitation to the public to purchase share or debentures of the company.
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