Company Accounts: Company and Its Formation
Company is an artificial person created by law with distinct legal existence to carry on business activities for profit. It is a voluntary association of individuals for profit having capital divided into transferable shares. The company is managed by the representatives of shareholders called board of directors.
Characteristics/Features of a company
The main characteristics of a company are as follows:
- Artificial Person: A company is an artificial person created by law. It has the rights to enter into contracts and it can buy and sell the properties in its own name. It can sue and can be sued. It enjoys almost all the rights of a natural person.
- Perpetual (Continuous) existence: Being an independent body, the life of the company is not connected with the life of its shareholders. The law creates the company and the law brings it to an end. It is a corporate body. Its shareholders may transfer their shares and new persons may come in their place but the existence of the company is not affected.
- Limited liability: The limited liability is another important feature of a company. If anything goes wrong with the company, the shareholder’s liability is limited by the amount of the shares held by him. In other words, other than the money one has invested, one cannot be called upon to pay even a single paisa more out of one’s pocket in order to meet the company’s obligations.
- Democratic management: A company is a democratic organization. The decisions are taken in the annual general meeting and the board meeting by following the principles of democracy. The board is elected and dismissed according to the interest of the majority of shareholders.
- Transferability of shares: The part of the capital owned by a shareholder are called shares. The shares are transferrable in nature. Any person can be the member of the company by purchasing shares and withdraw its membership by transferring his shares without prior permission of the company management.
- Common seal: As the company has no physical form, it cannot sign any contract in its name. Most of the transactions are signed by the directors who act as agents of the company. It uses a common seal for its official signature. Therefore, any document without common seal of the company is not taken into consideration and the company is not liable for the same.
Types of company:
A. On the basis of Incorporation:
- Chartered Company: The Company which is established by Royal Charter is known as Chartered Company. The law that governs these companies does not govern other companies. For eg. East India Company, the bank of England, etc. Such companies cannot be found these days.
- Statutory Company: Companies formed under the special act of parliament are known as statutory company. It is established for the betterment of the nation. Nepal Rastra Bank, Nepal Industrial Development Corporation, Nepal Airlines, Nepal Insurance Company, etc are some examples of statutory company. These companies are also known as public companies.
- Registered Company: Companies registered under Nepal Company Act 2063 are known as registered companies. Registered companies are also known as ltd company. Majority of companies that exist today are registered limited companies.
B. On the basis of Liability:
- Unlimited Companies: Those registered companies in which the members have unlimited responsibility over the debt of company as per agreement even by using private property falls under this company.
- Limited by Guarantee: In this companies, each member promises to pay a fixed extra sum of money during liquidation of the company. This amount is called guarantee. The amount of guarantee may differ from member to member
- Limited by Shares: The company in which the liability of a shareholder is limited to the fixed value of shares. Members don’t have to pay other than the unpaid amount of his shares. Most of the companies come under this group.
C. On the basis of members:
- Public Company: A company which collects major capital offering shares to the general public. Its number of membership is governed by the authorized capital. The should be at least members. A public company must get the certificate of commencement of business after registration and write Ltd. at the end of its name. Eg: Nepal Bank Ltd. Kumari Bank Ltd. Nepal Credit and Commerce Bank Ltd. etc.
- Private Company: A company whose shares may not be offered to the public for sale and which operates under legal requirements less strict than those for a public company. The number of its member is limited from 1-50. It can carry on its activities immediately after its registration. It must add Pvt. Ltd at the end of its name.
D. On the basis of ownership:
- Government Company: A company in which no less than 51% of paid up capital is held by the government is called government company. Eg: Himal Cement, Janakpur Cigrattee Company, Lumbini Sugar Mills, etc.
- Non-government Company: A company which is not a government undertaking is called non-government company. Generally, it is owned, managed and controlled by the private sector. Eg: Buddha Air Pvt Ltd, Chaudhary Group Pvt Ltd., etc.
Difference Between Private Company and Public Company
|Basis||Private Company||Public Company|
|No of members||One person will be enough to start a Pvt. Ltd Company with a maximum of 50 members||At least 7 persons must be there to form a public company. The maximum number is not limited.|
|Issue of Shares||A Private limited company can’t issue shares||A public limited company can issue share|
|Transfer of shares||Transfer of shares is restricted.||Transfer of shares can be done easily|
|Prospectus||Not compulsion to publish prospectus to register company||Compulsory to publish prospectus to register company.|
|Remuneration||There is no legal restriction for remuneration of Director.||Certain restrictions on the payment of Directors salary|
|Ltd/ Pvt. Ltd||Must add the words ‘Pvt Limited’ at the end of its name.||Must add the words ‘Limited’ at the end of its name.|
Company promoters are the people who give birth to a company. Promoters generate the idea and discover business opportunities. They make detailed investigation about the feasibility of the business, financial sources and competitors. They prepare necessary document like the MoA, AoA and the prospectus to register the company. The promoters may be anybody such as an entrepreneur, a professional promoter, government and financial institutions. The main functions of promoters are as follows:
- To develop the idea of starting a business. • To investigate and verify the feasibility of the business. • To select the name and the site of the business.
- To determine the objectives of the business. • To prepare necessary documents for its registration. • To make the plan of financial sources
Main documents of a company:
Memorandum of Association: A Memorandum of Association (MOA) is a legal document prepared in the formation and registration process of a limited liability company to define its relationship with shareholders. The MOA is accessible to the public and describes the company’s name, physical address of registered office, names of shareholders and the distribution of shares.
Article of Association: The Articles of Association is the legal document that along with the memorandum of association serves as the constitution of the company. It describes the rules and regulations that govern the company’s internal affairs. The articles of association are concerned with the internal management of the company and aims at carrying out the objectives as mentioned in the memorandum. It covers the information related to the board of directors, general meetings, voting rights, board proceedings, etc.
Prospectus: Prospectus is the brief report of the company describing the major features of a proposed business including attractions, service, institution, patrons, owners, promoters, members, etc. Prospectus is an invitation to the general public to participate or purchase the shares of the company. Public limited company need to manage the capital from the general public by issuing the shares. The prospectus which is to be published should be approved by the concerned department of Govt. of Nepal.