Company: Legal Definition, Structure, Corporate Personality, Legal Entity and Liability
What is a Company?
A company (or corporation) is a legal entity formed by a group of individuals to operate a business, recognised as distinct from its owners with its own rights and liabilities.
Company Definition: More Than Just a Business
In the dynamic world of commerce, the term ‘company’ is ubiquitous and carries significant weight, not just in business parlance but also in legal terminology.
A corporation, in its legal essence, is far more than a mere collective term for a group of individuals working towards a common business goal.
At its core, a company is an artificial person created by law. It is an association of persons who have come together for a common purpose, typically to engage in commercial or industrial activities.
However, legally, a company stands apart from the mere aggregation of its members. The definition of a company has been shaped through statutes, case law, and legal traditions that vary from one jurisdiction to another.
Legal Personality: The Cornerstone of a Company’s Identity
One of the most fundamental legal attributes of a corporation is its status as a separate legal entity. This means that a company has its own legal personality, distinct from its founders, shareholders, and directors – see Foss v Harbottle (1843)
A corporation own property, incur debts, sue and be sued, and enter into contracts in its own name.
This concept of separate legal personality was established in the landmark case of Salomon v. A Salomon & Co Ltd (1897), where the House of Lords affirmed that a company is an independent entity from its members.
Limited Liability: A Key Advantage for Corporations
Closely tied to the concept of legal personality is the principle of limited liability.
This principle ensures that the financial liability of the shareholders or members of a company is limited to the amount they have invested or agreed to contribute.
This protection means that if a corporation fails, its investors will not be personally liable for its debts beyond their initial investment.
This feature has been pivotal in encouraging investment and entrepreneurship, as it mitigates personal financial risk.
Types of Companies: Various Legal Forms
The law recognises various forms of corporations, each with specific features and legal implications:
- Private Limited Company: This is the most common form for small to medium-sized businesses. Private limited companies do not trade on public exchanges, and there are restrictions on the transfer of shares.
- Public Limited Company: Larger in scale, these companies can offer shares to the public and are subject to stringent regulatory requirements.
- Unlimited Company: In such companies, there is no limit to the members’ liability. They are rare and typically chosen for specific tax or financial reasons.
- Company Limited by Guarantee: Often used by non-profits, the liability of members is limited to the amount they agree to contribute in the event the company is wound up.
- Partnership Companies: While not separate legal entities in traditional partnerships, some jurisdictions allow for the creation of limited partnerships or limited liability partnerships (LLPs), which combine partnership arrangements with limited liability protections.
What is a Holding Company?
A holding company is a type of firm that does not conduct its own business operations, but instead owns shares in other companies to control them. Its primary purpose is managing these subsidiaries, which are separate entities, potentially in diverse industries.
This control can involve a significant stake or majority ownership. Holding companies derive income from dividends, asset sales, and shared resources, providing a strategy for risk management and investment diversification.
What is a Subsidiary Company?
A subsidiary company is a business entity that is either partially or wholly owned by another corporation, known as the parent or holding company. While it operates independently, major decisions often require approval from the parent corporation.
Subsidiaries can focus on specific business areas, diversifying the parent’s business portfolio.
They maintain their own legal identity and can have their own branding, management, and operational strategies, yet are legally bound to their parent company.
Formation of a Company: The Birth of a Legal Entity
The process of forming a corporation involves legal procedures that culminate in its recognition as a legal entity. This process usually includes:
- Choosing a Company Name: The name must be unique and not similar to any existing corporation.
- Drafting the Constitution: The constitution of a company, which includes the articles of association and sometimes a memorandum of association, outlines the corporation’s structure, rules, and purpose.
- Registration: The company must be registered with the appropriate government body, such as the Companies House in the UK or the Secretary of State in the US.
- Issuance of a Certificate of Incorporation: Upon successful registration, a certificate is issued, marking the legal birth of the corporation.
Corporate Governance: Steering the Legal Entity
Corporate governance refers to the system of rules, practices, and processes by which a corporation is directed and controlled. It encompasses the mechanisms by which corporations, and those in control, are held to account.
Good corporate governance ensures that a corporation operates in a legal, ethical, and socially responsible manner, balancing the interests of its diverse stakeholders, including shareholders, management, customers, suppliers, financiers, government, and the community.
Read post: What are Foreign Invested Enterprises (FIEs)? Laws, Regulations and Economic Development
What is the Impact of Legal Personality on Corporations?
It means that the corporation continues to exist even if its members change, die, or leave the corporation, often referred to as ‘perpetual succession.’ It also means that the corporation’s finances are separate from the personal finances of its members, leading to implications for taxation, liability, and asset protection.
How Can a Company Raise Capital?
Common methods companies use to raise capital include issuing stocks or shares to the public (equity financing), where investors buy a stake in the corporation. Alternatively, it can opt for debt financing by taking out loans from financial institutions or issuing bonds, which must be repaid with interest.
Smaller or newer corporations often seek angel investors or venture capitalists, who provide capital in exchange for equity.
Crowdfunding platforms are increasingly popular, allowing companies to raise funds directly from the public. Additionally, companies can reinvest profits back into the business as a form of internal financing.
A corporation can raise capital through various means, each suited to its size, industry, and growth stage.
Conclusion
A company, in its legal sense, is a sophisticated and multifaceted entity that wields significant power and faces considerable responsibility.
The creation and regulation of corporations are pivotal in shaping the economy and providing a framework within which business can flourish.
