What is a Company?
A company is a legal entity formed by individuals or groups with the purpose of conducting business activities. It offers numerous advantages that make it an appealing option for entrepreneurs and investors. First and foremost, a company provides limited liability protection, separating personal assets from business debts. This shields the owners, known as shareholders, from being personally responsible for the company’s financial obligations. Additionally, a company can raise capital by selling shares to investors, enabling it to finance its operations and expansion. Moreover, a company has perpetual existence, meaning it can continue its operations even if shareholders come and go. This stability facilitates long-term planning and growth. However, there are also disadvantages to consider.
A company involves more complex legal and administrative requirements compared to other business structures. Compliance with regulations and reporting obligations can be time-consuming and costly. Additionally, decisions within a company may require consensus among shareholders, potentially leading to slower decision-making processes. Finally, companies are subject to higher levels of scrutiny, including tax audits and public disclosure of financial information. Therefore, it is advisable to consult a lawyer for new business who specializing in Business law to navigate the legal complexities and ensure compliance with relevant regulations.
In general parlance, any commercial activity undertaken by a group of people under a registered name for the same is called a company. The word “Company” cannot be restricted to have legal or technical usage or meaning as it is a common word in colloquial conversation.
According to Lord Justice Lindley defines that “A company is an association of many person who contribute money or monies worth to common stock and employed in some trade or business and who share the profit and loss arising the form. the common stock so contributed is denoted in money and is capital of the Company. The person who contribute to it or to whom it pertains are members. The shares are always transferable although the right to transfer is often more or less restricted.”[1]
According to Section 2(20) of The Companies Act, 2013 defines a Company as “a company incorporated under this Act or under any previous company law”.[2]
ADVANTAGES OF THE COMPANY
The establishment of a Company by an entrepreneur enables him to achieve advantages as compared to that of other forms of business which include sole trading concerns, partnership firms and such. Some of the advantages of establishing a company are listed below:
1. Availability of large amount of Resources and Economies of Scale in Production
Sole Trading Concerns and Partnership firms suffer due to low resources and are mostly in need of funds. The company enables investment from an unlimited number of shareholders (in public company). The requirement of larger funds can be solved through increasing the number of shareholders. Joint Stock Companies are a go-to choice for large scale businesses.
The higher amount of resources in production enables the company to enjoy economies of scale by reducing the cost of production. As such the companies earns higher profit due to its large margin between the cost of the production of the product and the selling price of the product.
2. Restriction on Liability
The liability of the shareholders in the Company is generally limited. There exist companies with unlimited liability too. However, compared to sole trading concerns and partnerships where there exists unlimited liability, the companies fare better in inviting funds. As the liability of any such person is limited to the amount that is invested.
3. Management
Companies enjoy an isolated management from that of ownership. They are managed by the Board of Directors who are democratically elected. These are qualified people who have sound knowledge and experience with respect to managing the company as well as the field in which the business is operating.
4. Unaffected Existence
The company’s existence is not affected as in the manner of the other forms of business where the death of the owner leads to varied consequences on the ownership and continuity of business. There may be several members of the company who come and go, but the company enjoys a separate legal existence bound to continue till there is an end initiated through legal means
The shares of the company held by the shareholders can be easily marketed in the Stock Market. The restrictions are high in other forms of business. This feature of transferability also increases the habit of investment in people.
6. Research and Training
Companies have higher resource funds available and ability to afford to employ specialized individuals. They do research on a large-scale and the expense will not be too high for the company as compared to sole trading and firms. Through research, the company can level up in its business and also invest inadequate training of employees.
7. Spreading of Risk
Risk is a part and parcel of any business. However, a company is not discouraged to undertake risks in business because the sharers of the risk are high in number. This makes the risk seem insignificant. But for sole trading concerns, any risk that ends up in loss will be a make or break situation.
8. Societal Development
Companies enable a concentrated usage of resources and mobilize the savings of the community in order to provide back to society products and services that fulfill their demands and wants. The Corporate Social Responsibility of the Companies also brings out social benefits for the community.[3]
DISADVANTAGES OF The COMPANY
Though this business type has a lot of advantages as stated above it does not mean that it does not have shortcomings. The shortcomings of a company as a type of business is mentioned below:
1. The procedure for setting up a company is cumbersome. It involves a number of stages starting from the promotion which is an expensive job. The shares are to be sold in the stipulated time. The legal formalities are extensive too.
2. The ownership and management are held in different hands. The personal interest in the growth of the business is sometimes absent amongst members of the Board. Minority shareholders do not have much of a say in the decision of the management.
3. Production Companies more or less are involved in processes that have negative externalities on the environment and society.
4. The monopoly of certain business in a particular product or service area pose entry barriers to new entrants and sometimes being the dominant player of the market, the company tends to exploit customers
5. The long hierarchy of the organization delays the decision process, the non-transparency of business secrets cannot be maintained as there are a lot of members involved.
6. The directors sometimes work towards the furtherance of their own interests. Policies formed by such members become detrimental for other divisions of the company.
7. The government involves highly in the internal and external activities of the company through regulations, laws, and compliances as there is a high amount of public money invested in the business. The company at times has to focus on these excessive regulations and is delayed in achieving its objectives.[4]
CONCLUSION:
Companies are not only classified as public and private. There are several more kinds of classification on the basis of ownership, liability and other reasons. Companies are the forms of business which are regulated by the government in all aspects when compared to other forms of business. The media, social and governmental audits of companies enable consumers to know whose product they are buying or whose service they are availing. For the expansion of any business, it’s better for it to function as a company and avail governmental benefits.
[1] Sunita Meena, “What is a Companies?”, Legal Services India, http://www.legalserviceindia.com/legal/article-1293-what-is.html
[2] Section 2 (20), Companies Act 2013
[3] RC Agarwal, Advantages and Disadvantages of Companies form of Organisation, Your Article Library, https://www.yourarticlelibrary.com/ companies/advantages-and-disadvantages-of-company-form-of-organisation/42056
[4]What is a Companies? Definition, Characteristics, Advantages, Disadvantages, IEdunote, https://www.iedunote.com/companies-definition-characteristics-advantages-disadvantages.
This Article is Authored by Dechamma KC, 4th Year B.B.A LL.B Student at JSS Law College, Mysuru.
