1.1 Nature and characteristics of a company

Characteristics of a Company

The principal characteristics of an incorporated company can be summarized as follows:


A company comes into existence only after registration under the Companies Act.

  1. Voluntary Association

A company is an. association of many persons on a voluntary basis. Therefore a company is formed by the choice and consent of the members.

  1. Legal personality

A company is regarded by law as a single person. It has a legal personality. This rule applies even in the case of “one-man company” such as in the case of Salomon v. Salomon & Co. Ltd.

Salomon had a business in boot manufacture. He formed a company called Salomon & Co. (with himself, his, wife daughter and 4 sons as shareholders) and transferred to it his business. As consideration for the transfer he received the major portion of the shares of the company and debentures for £ 10,000.  Later on, the company went into liquidation. Salomon, as a debenture holder, claimed to be a secured creditor and demanded priority in the payment of £ 10,000, out of the assets of the company. The unsecured creditors of the company objected on the ground that the business really belonged to Salomon and he should not be allowed to claim as a secured creditor. It was held that Solomon as an individual, was quite distinct from Salomon & Co. and he could therefore be a secured creditor of the company, even though he happened to hold the majority of the shares.

  1. Contractual capacity

A shareholder of a company, in its individual capacity, cannot bind the company in any way. The shareholder of a company can enter into contract with the company and can be an employee of the company.

  1. Management

A company is managed by the board of directors, whole time directors, managing director or manager. These persons are selected in the manner provided by the Act and the Articles of Association of the company. A shareholder, as such, cannot participate in the management.

  1. Permanent Existence /perpertual succession

A company has a continuous existence. Old shareholders may go and new ones may join; the death, bankruptcy or insanity of a shareholder does not affect the existence of the company. This means that  its life is independent of the life of its members. The change in the membership of the company does not affect its continuity. The company continues its operations so long as it fulfills the requirements of the law under which it has been formed.

  1. Common Seal/stamp

A company being an artificial person cannot sign documents. The law has provided for the use of a common seal, with the name of company engraved on it, as a substitute for its signature. No document issued by the company shall be binding on it unless it bears the common seal, which is duly witnessed by at least two directors of the company.

  1. Limited Liability

A shareholder shall be liable to contribute towards the debts of the company during its life or during winding up only at the extent of shares taken by him/her and only to the balance of shares taken by him or up to the guarantee given by him or both.


Members of public limited company are free to transfer their shares to anybody. Shares can be sold and purchased through the stock exchange. However, in a private company the articles may restrict such transfer.

  1. Artificial Legal Person

A company is an artificial person because it is a creation of law. It does not take birth like a natural person but it comes into existence through law. It exists in the eyes of the law and cannot act on its own. It has to act through a board of directors elected by shareholders. It was rightly pointed out in Bates v. Standard Land Co. that: “The board of directors is the brains of the company, which is the body and the company can and does act only through them.”

Although a company is an artificial legal person, it enjoys all the rights of a natural person. It has the right to acquire and dispose of the property, to enter into contract with third parties in its own name, and can sue and is sued in its own name.

  1. Residence

A company has a residence (for taxation and other purpose).

  1. Separate Legal Entity

Companies Act provides for a separate legal existence from its shareholders. From the date of incorporation as mentioned in the certificate of incorporation, a body corporate by the name contained in the memorandum is formed. Such a body corporate is capable of having perpetual succession, power to hold land, has a common seal with liabilities of its members limited as per the provisions of the Act.

 Capacity to Sue and be Sued

The suits of the company are suits of the company, and not of the shareholders. Therefore in case of suits for the company, the company is the proper plaintiff and where the company is sued, it is the proper defendant.