Why company form of organization is the most ideal form for all types of business?

Answer 1

A company is a voluntary association of persons, recognized by law, having a distinctive name, a common seal, formed to carry on business for profit, with capital divisible into transferable shares, limited liability, a corporate body and perpetual succession. An analysis of this definition will bring out the distinctive characteristics of a company.

Creature of law:

A company is a creation of law, and is sometimes called artificial person. It exists only in contemplation of law and therefore has no physical shape or form. Although invisible and intangible, as a legal person, it enjoys almost all the rights of natural person. It has a right to enter into contracts and own property. It can sue and can be sued. The legal personality is one of its distinctive features.

Distinct legal entity:

Being a creature of law, a company is a legal entity, something distinct from the persons who are its members. A shareholder is not liable for the acts of the company, even though he holds almost all of the shares. Also the shareholders cannot bind the company by their acts. They are not its agents. As the company is an artificial creature of law, distinct and separate from its members, a shareholder can both own its share and be its creditor. The life of the company is independent of the lives of its members. Even if all the members die, the company does not come to an end because of their demise.

Limited liability of members:

The limited liability is another important feature of a company. A person, by buying shares in a company, acquires an interest in the company, and is at liberty to dispose of these shares whenever he likes. If anything goes wrong with the company, his liability is limited by the nominal amount of the shares held by him. In other words, while he stands to lose the money he has invested, he cannot be called upon to pay a paisa out of his private property in order to help meet the company's obligations.

Perpetual Succession

The incorporation process brings into being a corporate body distinct and separate from the member who constitute it. The right given to shareholders to transfer their shares without in any manner affecting the position of the company gives the company continuity. As a natural consequence of incorporation and transferability of shares, the company has perpetual succession or interrupted existence. As we have noted above, the life of the company being independent of the lives of its member, its life expectancy is not limited to that of various founders. Members may come and members may go, but the company goes on uninterrupted (until, of course, wound up according to law). The law creates the company and the law brings it to an end.

Common Seal

The law requires every company to have a seal with its name engraved on it. As the company has no physical form, it cannot sign its name of a contract. Therefore, originally all documents and contracts required the affixing of the seal. But now most of the transactions are signed by the directors who act as its agents. When it is affixed on nay document, two directors must witness its affixation.

Divorce between Ownership and Management

The personality of the company is separate and distinct from those humans who compose it-the shareholders. Therefore, the shareholders cannot bind the company by their acts. Since the investors of capital are a heterogeneous group of people residing far and wide, they cannot manage the affairs of the company. They leave this task to their representatives-the Board of Directors. This characteristics of a company militates against the Golden Rule of Capitalism, which will be discussed later

The chief implication of the above analytical description of the company mat be summarized as follows:

1. It is a voluntary association

2. Of mutually agreeing persons, natural and legal;

3. It is an autonomous legal unit,

4. Distinct from its associating members

5. In name, in the duration of its life, and its liability to creditors;

6. It exists because the State has by statute enabled to exist.

In all respects company organizations differs radically from a partnership business.