Also referred to as a firm, a company is a type of for-profit organization that consists of people who have come together for a common commercial undertaking. A company is a separate legal entity, which means it’s different from its owners. It could be a corporation, limited liability partnership (LLP), statutory corporation, chartered company, unlimited company, flat organization, community interest company, etc. A sole proprietorship or partnership is not a company because the business and its owner(s) are not different from each other. In other words, the owner(s) of a partnership or sole proprietorship would be personally liable for the debts incurred by the business.
Types of Companies
A company usually gets categorized based on its:
- Incorporation (chartered company, statutory company, private company, public company)
- Liability (limited, unlimited)
- Ownership (government company, non-government company)
- Location (national company, foreign company, multinational company)
- Control (holding company, subsidiary company)
There are a few other types as well such as investment company, associate company, producer company and dormant company.
A company could also be a ‘one person company’, which is not the same as sole proprietorship as the owner of the former has limited liability. In case of a sole proprietorship, the owner and business are the same and there’s no limited liability.
Company Incorporation and Limited Liability
An incorporation gives the business a formal recognition and makes it more credible in the eyes of employees, vendors, potential customers and other stakeholders. In other words, it turns a business into a corporation, which means a business with a legal structure distinct from its owners.
This also means limited liability or the owner(s) would no longer be personally responsible for the liabilities and debts of the business. The owners would be responsible only for obligations and losses relating to their investment in the firm. This limited liability is, in fact, the reason why investors or shareholders come forward to invest in an incorporated company.
The act or law incorporating a company varies across regions. Business incorporation process entails selecting directors, choosing a unique company name, and constantly adhering to certain formalities. The formalities include holding director and shareholder meetings, keeping company meeting minutes, and adhering to disclosure rules such as filing annual reports and taxes.
Ownership and Management
A company usually doesn’t have a single owner. Bigger companies are owned by a group of people, which comprises business owners and shareholders. A public company trades its shares on the stock market and its shareholders are partial owners. The business owners keep majority ownership. There is no limit to the number of shareholders a public company can have.
Private entities have shareholders too but they aren’t members of the public. A private company usually doesn’t have more than fifty shareholders. The number, however, could change depending on the country the company is located in. For instance, a private company in India can have up to 200 shareholders.
Shareholders don’t manage or are not directly involved in the management of a public or private company. Business owners and directors shoulder that responsibility instead. A private company should have at least one director, and a public firm should appoint a minimum of two. These requirements may change with the company’s country of incorporation.
Also, a company may appoint a company secretary to manage a company, and an auditor who ensures the financial report, cash flow statement, income statement and other financial documents presented by the company is accurate and in conformance to industry laws.
Liquidating a Company
Generally, a company has an unlimited lifespan and death of its owner(s) or shareholder(s) doesn’t hurt operations significantly, or result in its closure. However, there are certain circumstances such as financial loss, bankruptcy, etc. that could result in a company’s closure.
Liquidation applies to both private and public companies. A company’s closure can be compulsory or voluntary. A voluntary closure is the members voluntarily winding up the firm if the company has achieved its objectives or if its prospects aren’t great.
A compulsory liquidation happens when a company is not able to pay its debts, hasn’t disclosed preceding years’ annual returns or financial statements, is guilty of fraudulent activities or has been formed unlawfully, etc. Such liquidations are initiated by the court and entail asset liquidation, which is then used to clear unpaid creditors. If the company’s assets aren’t sufficient to clear debts, it’s termed insolvent.
The court-initiated liquidation procedure entails appointment of a liquidator or administrator, who then takes charge of the firm in question, assembles its assets, clears debts of the firm, and distributes remaining funds among shareholders as per their liabilities and rights. Once a company is liquidated, its name is deregistered and it ceases to be distinct.