Class XII

Notes: Company Accounts

“Company means a company incorporated under this Act or any previous Company Law”

- Section 2 (20) of the companies Act 2013

A company is a voluntary association of individuals formed to carry on business to earn profits or for non profit purposes. These persons contribute towards the capital by buying its shares in which it is divided.

A company is an association of individuals incorporated as a company possessing a common capital i.e. share capital contributed by the members comprising it for the purpose of employing it in some business to earn profit.

Characteristics of a Company

Characteristics of a company are :

  1. Artificial Legal person
  2. Incorporated Body
  3. capital divisible into shares
  4. perpetual existence
  5. Limited Liability
  6. Representative management
  7. Common seal

Artificial legal person

A company is an artificial person as it is created by law. It has almost all the rights and powers of a natural person. It can enter into contract. It can sue in its own name and can be sued.

Incorporated body

A company must be registered under Companies Act. By virtue of this, it is vested with corporate personality. It has an identity of its own. Although the capital is contributed by its members called shareholders yet the property purchased out of the capital belongs to the company and not to its shareholders.

Capital divisible into shares

The capital of the company is divided into shares. A share is an indivisible unit of capital. The face value of a share is generally of a small denomination which may be of Rs 10, Rs 25 or Rs 100.

Transferability of shares

The shares of the company are easily transferable. The shares can be bought and sold in the stock market.

Perpetual existence

A company has an independent and separate existence distinct from its share holders. Changes in its membership due to death, insolvency etc. does not affect its existence and its continuity.

Limited Liability

The liability of the shareholders of a company is limited to the extent of face value of shares held by them. No shareholder can be called upon to pay more than the face value of the shares held by them. At the most the shareholders may be asked to pay the unpaid value of shares

Representative Management

The number of shareholders is so large and scattered that they cannot manage the affairs of the company collectively. Therefore they elect some persons among themselves to manage and administer the company. These elected representatives of shareholders are individually called the ‘directors’ of the company and collectively the Board of Directors.

Common seal

A common seal is the official signature of the company. Any document bearing the common seal of the company is legally binding on the company.


Companies can be classified under the following heads:

  1. On the basis of formation.
  2. On the basis of liability.
  3. On the basis of ownership.

1. On the basis of formation.

(a) Statutory Company
A company formed by a Special Act of parliament or state legislature is called a Statutory Company. Reserve Bank of India, Industrial Financial Corporation of India, Life Insurance Corporation of India, Delhi State Finance Corporation are some of its examples.

(b) Registered Company
A company formed and registered under the Companies Act, 1956 or earlier Companies Acts is called a Registered Company. The working of such companies is regulated by the provisions of the Companies Act.

2. On the basis of liability

On the basis of liability, companies can be categorised as:

(a) Company limited by shares
The liability of the member of such company is limited to the face value of its shares.

(b) Company limited by guarantee
The liability of each member of such company is limited to the extent of guarantee undertaken by the member. It may arise in the event of its being wound up.

(c) Unlimited Company
The company not having any limit on the liability of its members, is called an unlimited company. Liability in such a case extends to the personal property of its shareholders. Such companies do not use the word ‘limited’ at the end of their name.

(d) Company under section 25
A company created under section-25 is to promote art, culture and societal aims. Such companies need not use the term limited at the end of their name. Punjab, Haryana, Delhi chambers of commerce, etc. are the examples of such companies.

3. On the basis of ownership

On the basis of ownership, companies can be categorised as :

(a) Private Company
A private company is one which by its Articles of Association:
(i) restricts the right of members to transfer its shares;
(ii) Limits the number of its members to fifty (excluding its past and present employees);
(iii) Prohibits any invitation to the public to subscribe to its shares, debentures.
(iv) The minimum paid up value of the company is one lakh rupees (Rs 100000).

The minimum number of shareholders in such a company is two and the company is to add the words ‘private limited’ at the end of its name. Private companies do not involve participation of public in general.

(b) Public Copmpany
A company which is not a private company is a public company. Its Articles of association does not contain the above mentioned restrictions.
Main features of a public company are:
(i) The minimum number of members is seven.
(ii) There is no restriction on the maximum number of members.
(iii) It can invite public for subscription to its shares.
(iv) Its shares are freely transferable.
(v) It has to add the word ‘Limited’ at the end of its name.
(vi) Its minimum paid up capital is five lakhs rupees (Rs 500,000).

(c) Government Company
A Government company is one in which not less than 51% of its paid up capital is held by (1) Central Government or (2) State Government, or (3) partly by Central Government and partly by State Government. Example of a Government company is Hindustan Machine Tools Limited, (HMT) State Trading Corporation (STC). Minerals as metals training corporation (MMTC).

(d) Foreign company
A foreign company is one which is incorporated outside India but has a place of business in India, for example Philips, L.G, etc. standard materials.

(e) Holding company and Subsidiary company
A holding company is a company which controls another company (called subsidiary company) either by acquiring more than half of the equity shares of another company or by controlling the composition of Baord of Directors of another company or by controlling a holding company which controls another company.

(f) Listed company and unlisted company
A company is required to file an application with stock exchange for listing of its securities on a stock exchange. When it qualifies for the admission and continuance of the said securities upon the list of the stock exchange, it is known as listed company. A company whose securities do not appear on the list of the stock exchange is called unlisted company.

Difference between public company and private company
Basis of difference Public company Private company
1. Minimum Number of Members Minimum number of members required to form a public company is seven Minimum number of members required to form a private company is two
2. Maximum number of Members No limit on maximum number of members Maximum number of members is fifty
3. Name The word ‘Limited’ is used at the end of the company’s name The word ‘Private Limited’ is used at the end of the company’s name
4. Commencement of Business It can start its business only after getting a certificate of commencement of business It can commence its business as soon as it obtains certificate of Incorporation
5. Invitation to public it invites public to subscribe to its shares It cannot invite public to subscribe to its shares
6. Transfer of shares There is no restriction on transfer of its shares There is restriction on the transfer of its shares
7. Number of directors It must have at least three directors It must have at least two directors
8. Minimum Capital It must have a minimum paid up capital of five lakh rupees. It must have a minimum paid up capital of one lakh.

One person Company: company which has only one person as a member. Rule 3 of the companies (Incorporation) rules, 2014 provides that:
a) Only a natural; Indian citizen and resident in India can form OPC.
b) 1 person can form only 1 OPC.
c) It can’t be formed for charitable purpose; can’t carry out Non-Banking
Financial Investment activities.
d) Paid up capital is not more than Rs. 50 lakhs.
e) Its average annual turnover of three years does not exceed Rs. 2 crores.