What is a Company formation? introduction

What is a Company formation?introduction

Company formation Introduction  

There are difference types of business organizations. The oldest forms of business organization is sole trading concern, in which, an individual invest capital and run the business. The sole trading concern suffers from the drawbacks of limited capital and managerial skills. Other type of business organization is partnership firm. A certain number of persons joint together for their mutual benefit their financial resources, managerial and technical abilities for to purpose of operating a business. However, it also revolves around some limitations as unlimited liability, limited capital, difference of transfer ownership etc. 

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 A company is the developed from of business organizations which has evolved to overcome the limitation of sole trading and partnership organization. This types of business organization collects their capital issuing shares and has perpetual existence.

Meaning and concept of company
A company of joint stock company is the most widely followed form of business organization. It is voluntary association of persons who contribute capital to carry on particular types of business. It is established by law and can be dissolved only by law. Persons who contribute capital become members of the company and known as shareholder. This form of business has a legal existence separate from its members. In other words, the existence of the shareholders and the company are not related to each other which mean even if its member dies, the company remains in existence. This form of business organizations generally required large capital investment, which is contributed by its member. The total capital of a joint stock company is called share capital and it divided into a number of units called shares. Thus, every member has some shares in the business depending upon the amount of capital contributed by him.
Some of the definitions of Joint Stock Company are given below:
"A company refers to any company formed and resisted under this act." Nepal Company act, 2063bs
"A company is an artificial person created by low, having a separate legal entity, with perpetual succession and a common seal." India companies act 1956
"A corporation is an artificial being invisible, intangible and existing only in the contemplation of law." Chief justice Marshall of U.S.A.
"A company is an artificial person, created by law having a separate entity with a perpetual succession and a common seal." Prof. Haney

In conclusion, it can be stated that a company is an association of person having common interest which has a separate legal existence and incorporated according to low.

Characteristics of joint stock company
A joint stock company has proved itself as a distinct form of business organization due to the following characteristics.
Legal formation: no single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company comes into existence only when it has been registered after completion of all formative required by the company act.
Artificial person: a joint stock company takes birth, grows, enters into relationship and dies as ban individual. Hence, it is called an artificial person as its births, existence and death are regulated by low and it does not person physical attributes like that of a normal person. As artificial person, it can purchase and sell properties, sue or b sued in courts, enter into contract, open bank account etc.
Separate legal entity: a joint stock company has its own separate existence independent of its members. It means a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. it can sue and can be sued by other in the court of law, the shareholder cannot be held responsible for the acts of the company.
Common seal: a joint stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organization working on behalf of the company. Any document, on which the company's seal is put and is duly signed by any official of the company, become binding on the company. For example, a purchase manager may enter into a contract for buying raw material becomes valid. The purchase manager may level the company thereafter or may be removed from the job or may have taken a wrong decision, yet for all purpose the contract is valid till a new contract is made or the existing contract expires.
Perpetual existence: a joint stock company continues to exit as long as it fulfills the requirements. It is not affected by the death, lunacy, insolvency or retirement of any of its members. For example, in case of a private limited company having four members, if all of them die in an accident, the company will not be closed. It will continue to exist. In such a situation,f the shares of the company will be transferred to the legal heirs of the deceased members.
Democratic management: joint stock companies have democratic management and control. That is, even thought the shareholders are owners of the company, all of them cannot participate in the management of the company. Normally, the shareholders elect representatives from among themselves known as 'directors' to manage the affairs of the company.
Transfer-ability of share capital: the share of a company are freely transferable from one person or party to another person or party except the case of private companies. A shareholder can transfer his/her shares to any person at his/her will without the consent of other shareholders. The transfer of the share changes the ownership and does not affect in the regular function of the company.
Types of companies
The companies can be classified into various types depending upon formation, liability, ownership, domicile and control. They have been mentioned below in detail.

 On the basis of formation or incorporation
On the basis of formation, companies are divided into three types as mentions below:
Chartered company: a company, which is incorporated or established under special character or proclamation issued by the head of the state, is known as chartered company. The charter issued for the established of a particular company does not govern other companies. In own country, there is no existence of such company.
Statutory company: a company, which is formed or incorporated by a special act of parliament, in known as statutory companies. Such company is governed by their respective acts and do not have memorandum or articles of association.
Registered companies: a company, which is formed according to company act, is called Register Company. The provision of company act, memorandum of association and articles of association govern such company. Registered company may be further divided into two categories.
a.    Private company: a company is said to be private company which restricts the right of its members to transfer shares, limit the number of ites member to fifty and does not invite the public to subscribe its shares or debentures by its memorandum of association. A private company uses the words "private limited" after its name.
A private limited company enjoys a number of privileges over a public limited company. Some of them are mention below.
A private limited company may be formed even by a single person.
It can start its business immediately after getting certificate of incorporation.
A private company is not bounded to publish prospects while issuing shares for public subscription.
It can allot shares even if the minimum subscription is not subscribed.
It is not necessary to be statutory to public prospectus while issuing shares for public subscription.
It can allot shares even if the minimum subscription is not subscribed.
It is not necessary to hold statutory meeting or file statutory report with the company registrar.
b.    Public company: according to Nepal company act a company which is not a private is a public company. It needs minimum seven person. There is no demarcation for the maximum number of persons. There is no restriction on issue or transfer of its shares and it can invite the public its shares and debentures.

On the basis of liability
The companies are divided into two types, namely companies having limited liability and companies having unlimited liability on the basis of liability.
Limited liability Company. This liability can be limited in two ways.
a.    Liability limited by shares: the company in which the liability of shareholder is limited to the extent of the value of shares held by them is called the company having limited liability by shares. Most of the companies registered under the company act are of this type.
b.    Liability limited by guarantee: the company where shareholders promise to pay a fixed amount to meet the liability of the company in the case of liquidation is the company limited liability by guarantee. This assurance is called guarantee and such amount of guarantee is mentioned in the memorandum of association or articles of association.
Unlimited liability company: a company where the liability of the shareholders goes beyond the value of share invested by them is called a company having unlimited liability. If such company goes into liquidation, the members can be called upon to meet the liability even using their private properties.

On the basis of ownership
On the basis of ownership, the companies are divided into two types as mentioned below.
Government Company: a government is a company in which at least 51% of the paid up capital has been subscribed by the government.
Non-Government Company: if the government does not subscribe a minimum 51% of the paid up capital, the company is called a non-government company.
On the basis of domicile
On the basis of domicile, the companies are divided into three types as mentioned below:
National company: a company, which is registered in a country by restricting its area of operations within the national boundary, is known as a national company.
Foreign company: a foreign company is a company having business in a country, but not registers in that country.
Multinational company: the company that has its present and business in two or more countries is called multinational company. Such company carries on business activities in more than one country.
On the basis of control
On the basis of control, the companies are divided into two types as mentioned below:
Holding company: a holding company is a company, which holds all, or majority of the shares capital of other companies so as to control such companies.
Subsidiary company: a company, which operates its business under the control of another company i.e. holding company, is known as a subsidiary company.

Advantages of company form of organization
There are many advantages which the company form a business organization enjoys over other forms of business organization. They are mentioned below:
Large financial resources: a joint stock company is able to collect a large amount of capital through small contri butions from a large number of people. In public limited company shares can be offered to the general public to raise capital. They can also accept deposit from the public and issue debentures to take more risk.
Limited liability: in case of accompany, the liability of its members is limited to the extent of the value of share held by them. Private property of members cannot be attached for debts of the company. This advantage attracts may people to invest their saving in the company and it encourages the owners to take more risk.
Professional management: management of a company is evened in the hands of directors, who are elected democratically by the members or shareholders. These directors as a group knows are board of directors or simple board manage the affairs of the company and are accountable to all the members. So, members elect capable persons having sound financial, Ge and business knowledge to the board so that they can manage the company efficiently.
Large scale production: due to the availability of large financial resources and technical expertise it is possible for the companies to have large-scale production. It enables the company to produce more efficiently and at lower cost.
Contribution to society: a joint stock company offers employment to a large number of people it facilitates promotion of various ancillary industries, trade and auxiliaries to trade. Sometimes it also donates money towards education, health and community services.
Research and development: only in company form of business it is possible to invest a lot of money on reach and development for improved processes of production, new design, better quality products, etc. it also takes care of training and development of its employees.
Limitations of joint stock company
In spite of many advantages of the company for of business organization, it also suffers from some limitations. Let us note the limitations of Joint Stock Company.
Difference to form: the formation or registration of Joint Stock Company involves a complicated procedure. A number of large documents and formalities have to be completed before a company can start its business. It required the service of specialists such as chartered company can star its business. It required the services of specialist such as chartered accounts; company secretaries etc. therefore, cost of formation of a company is very high.
Excessive government control: joint stock companies are regulated nubby government through companies. Act and other economics legations. Particularly, public limited companies are required to adhere to various formalities as provides in the companies act and other legislation. Non-compliance with invites heavy penalty. This affects the smooth functions of the company.
Delay in policy decision: generally policy decisions are taken at the board meeting of the companies. Further the company has to fulfill certain production formalities. These procedures are time consuming and therefore, may delay on the decisions.
Concentration of economic power and wealth in few hands: a joint stock company is a large scale business organization having huge resources. This gives a lot of economic and other conditions in the society, e.g., having monopoly over a particular business or industry or product, exploitation of works consumers and investors.
Suitability of joint stock company
A joint stock company form o business organization is found to be suitable where the volume of business is large and huge financial resources are needed. Since members of a joint stock company have limited liability it is possible to raise capital from the public without much difficulty. This form of organization is also suitable for business which involves heavy risks. Again, for business activities which required public support and confidence, joint stock form is preferred as it has a separate legal statue. Certain types of business, like production of pharmaceuticals machine manufacturing, information technology. Iron and steel, aluminum, fetuses, cement, etc. are generally organized in the form of Joint Stock Company.
Meaning and concept of share
The capital of a company is divided into a number of units of fixed value. Each unit Is called a share. The company act defines a share as "a share or part in the share capital of the company". It is the proportionate part of the share capital and indicates ownership in a company. In other words, a share represents the extent of ownership or interest in the assets and profit of the company. A company may divide its capital into share of rs 10, rs. 5, rs. 100 or any suitable amount, but it is always preferable to have shares of small denomination in order to bring them within the reach of small investors.
A share is issued by a company in the form of certificate with its seal. It is a personal and movable property, which can either be mortgaged or pledged. It is measured by a sum of money for the purpose of liability and of interest (dividend) of its holds. The persons who contribute money through shares are known as 'shareholder. A shareholder enjoys certain rights such as right to dividend, right to vote and is liable to pay the unpaid balance on the share if any.

Types of shares
According to the Nepal Company Act, a company can now issue only two types of share:
•    Equity shares
•    Preference shares

Equity share
The shares that carry no preferential or special rights on dividend and refund of capital at the time of liquidations of the company are called equity shares. Since, they carry no preferential rights. They are also known as ordinary shares or common stock.
Dividend on such share is payable only after the payment of preference dividend. The rate of dividend on these shares is not fixed. The board of directors declares dividend on such shares according to the dividend policy as well as the availability of profit after dividend on preference shares. No dividend will be paid on these shares, if there are no profits or incipient profit in a particular year. These shares are redeemed only after the redemption of preference shares at the time of liquidation of the company.
Equity shareholders enjoy voting rights. They have right to elect directors and participate in the management and control of the company. They also share the residual profits.
Preference shares
Preference shares are those, which enjoy some preference rights. The first is dividend at a fixed rate or amount before any dividend to equity shares. The later is the redemption of such share capital is made before the redemption of equity share capital on liquidation of the company. However, preference shareholders do not carry voting right.
Types of preference shares
The major types of preferences shares are as follows:
Cumulative preference shares: when unpaid dividends on preference shares are treated as arrears and are carried forward to subsequent years, then preference share are known as cumulative preference shares. In other words, the preference share are said to be cumulative preference shares, if there are no profit in one year and the arrears of dividends are carried forward and paid out of the profits of subsequent years. It means unpaid dividend on such shares is accumulated till is paid off in full. A preference share is treated as a cumulative one, unless otherwise it is stated clearly.
Non-cumulative preference shares: these are those preference shares, which have right to get fixed rafter of dividend out of the profit of current year only.  They do not carry the right to receive arrears do dividend. Fails to pay dividend in a particular year then that need not to be paid out of futures profits. If no dividend is paid in a particular year, it cannot be carried forward but it lapses.
Redeemable preference shares: those preference shares, which can be redeemed or repaid after the expiry of a fixed period or after giving the prescribed notice as desired by the company, are known as redeemable preference shares. Such preference shares can be redeemed out of profits or out fresh issue of share for the purpose of redemption, only if they are fully paid up. Terms of redemption are announced at the time of issue of such shares.
Non-redeemable preference shares: those preference shares, which cannot be redeemed during the lifetime of the company, are known as irredeemable preference shares. The amount of such shares is paid only at the time of liquidation of the company.
Participating preference shares: if the preference share have right to participate in any surplus profit of the company after paying the dividend to equity share holders, in addition to particular the surplus of assets left are called participating preference shares. They also participate the surplus of assets left repayment of capital to equity shareholders on the winding up the company.
Convertible preference shares: the preferences shares, which can be converted into equity shares at the option of the holder after period according to the terms and conditions of their issue, are known as convertible preference shares.
Non-convertible preference shares: preference shares, which are not convertible onto equity shares, are called non-convertible preference shares.

Distinction between equity and preference shares
The main difference between equity shares and preference share are as follows:

Meaning of share capital
A joint stock company needed capital in order to finance its activities. It reises its capital by issue of share. The memorandum of association states the amount of capital with which the company is to be registered and the number of share into which it is to be divided. When total capital of a company is divided into shares, them it is called share capital. It constitutes the basis of the capital structure of a company. In other words, the capital collected by a joint stock collected from its shareholder for achieving the common goal of the company as toted in memoreeandum of association.
Types of share capital
Share capital of a company can be divided into the following different categories.
Authorized or registered or maximum or nominal capital: the maximum amount of capital, which a company is authorized to raise from the public by the issue of share, is known as authorized capital. It reference to the amount of capital mentioned in the capital clause of memorandum, it also known as registered capital. Similarly, it is also known as nominal capital, because a company has this capital only in name.
The authorized share capital can be increased from time to time by amending the memorandum itself. It is shown on the liability side of the balance sheet.
Issued capital: generally, a company does not issue its entire authorized capital to the public for subscription, but issue only a part of it. So, issued capital is a part of authorized capital, which is offered to the public for subscription, including share offered to the vendor for consideration other than cash. The part of authorized capital not offered for subscription to the public is known as 'UN-issued capital'. Such capital can be offered to the public at a later date.
Subscribed capital: the part of issued capital, which is subscribed by the public is known as subscribed capital. On other words, it is that portion os issued capital, which has been taken up by the public. The balance of issued capital not subscribed for by the public is called the 'unsubscribed capital.
Called up capital: it is the part subscribed capital, which is called by the company. A company may not call the entire amount of share subscribed by the shareholder. The amount called up is called and not called is known as uncalled capital.
Paid-up capital: the amount of called up capital which has been actually paid by the shareholders is called as paid-up capital and the amounts yet due from the shareholders are called as 'calls-in-arrears.'
Reserve capital: it is that part of uncalled capital which has been reserved by the company by passing a special resolution to be called only in the event of its liquidations. This capital cannot be called up during the existence of the company. It would be available only in the event of liquidation as an additional security to the creditors of the company.
Explain the concept of a company.
A company or joint stock company is a voluntary association of persons established by law ad can be dissolved only by law. Persons established capital becomes members of the company and knows contribute. This form of business has a legal existence separate from its members. Hence, the existence of the shareholders and the company are not related to each other which mean even if its members die, the company remains in existences. It required company is called share capital and it is divided into a number of unit called shares. The companies in Nepal are government by the Nepal company act, 2053.
List out the characteristics of a joint stock company.
Joint Stock Company has proved itself as a districts form of business organization due to the following characteristics.
•    Legal formation
•    Artificial person
•    Separate legal entity
•    Common seal
•    Perpetual existence
•    Limited liability
•    Democratic management
•    Demonstrability of share capital
Explain is brief, the types of company on the basis of formation.
On the basis of formation, companies are divided into three types as mentioned below:
Charted company: A company, which is incorporated or established under special charter or proclamation issue by the head of the state, is, knows as chartered company.
Statutory company: A company, which is formatted or incorporated by a special act of parliament, is, knows as testator companies.
Registered companies: a company, which is formed according to company act, is called registered company. Registered company may be further divided into two categories namely private and public company.
Write the difference between private and public companies.
No. of members: a public company needs at least seven numbers for its formation where one member is sufficient in case of private company. However, the maximum number of members with public company is unlimited and it is fifty with private company.
Issue of prospectus: it is necessary for a public company to issue prosepectuals to subscribe its shares. It is not so with the case of private company.
Rustication on share transfer: the shares of a public company can be transferred without any restriction. However, the shares of private company can be transferred with the consent of the directors.
Name: the name of a public company is followed by the word 'limited'. However, a private company has to mention the words 'private limited at the end of its name.
Point out the advantage of company form of organization.
There are many advantages which the company form of business organization enjoys over other forms of business organization. They are mentioned below:
•    Large financial resources
•    Limited liability
•    Professional management
•    Large-scale productions
•    Contributions to society
•    Research and development
Mentions the limitations of Joint Stock Company.
In spite of many Advantest of the company form of business organization, it also suffers from some limitations. Let us note the limitations of Joint Stock Company.
•    Difficult to form
•    Excessive government control
•    Delay in policy decisions
•    Concentration of economic power and wealth in few hands
Write the meaning of shares.
The capital of a company is divided into a number of units having fixed value, each unit is called a shares. The company act defines a share as 'a share or part in the share capital of the company.' It is the proportionate part of the share represents the extent of ownership. In other words, a share represents the extent of ownership or interest in the assets and profits of the company. There are two types of shares namely.
•    Equity share
•    Preference shares
Write in brief about the equity share.
The shares the carry no preferential or special right on dividend and refund of capital at the time liquidation of the company are called equity shares. Dividend on such shares is payable only after the payment of preference dividend. These shares at the time liquidation of the company. Equity shareholders enjoy voting rights.they rights to elect directors and participate in the management and control of the company. They also share the residual profit.
Define preference share capital and write about the different types of preference share capital.
The share switch have some preference right over the equity share are called preference shares. They get a fixed rate of dividend before the equity share. Such shares are redeemed before the redemption of equity shares at the time liquidations. However, preferences shareholders do not carry voting right. The major types of preference shares are as follows:
Cumulative preference shares: when unpaid dividends on preference shares are carried forward to subsequent years, then such preference share are known as cumulative preference shares.
Non-cumulative preference shares: these are those preference shares, which have right to get fixed rate of dividend out of the profit of current year only.
Redeemable preference shares: those preference shares, which can be redeemed or repaid after the expiry of a fixed period or after giving the prescribed notices as desired by the company, are knows as redeemable preference shares.
Non-redeemable preference shares: those preference shares, which cannot be redeemed during the lifetime of the company, are known as irredeemable preference shares.
Participating preference shares: if the preference shares have right to participate in any surplus profit of the company after paying the dividend to equity shareholders, in addition to the fixed rate of their dividend, they are called participating preference shares.
Non-participating preference shares: the preference shares having been converted into equity shares at the option of the holders after a fixed period according to the terms and conditions of their issue are known as convertible preference shares.
Convertible preference shares: the preference shares, which can be converted into equity shares at the option of the holders after a fixed period according to the terms and conditions of their issue, are known as convertible preference shares.
Non-convertible preference shares: preference shares, which are not convertible into equity hares, are called non-convertible preferences shares.
Differentiate between equity shares and preference shares.
The main difference between equity shares and preference shares are mentioned below under different bases.
Rate of dividend: the rate of dividend of preference shares is fixed whereas it not fixed with equity shares.
Redemption: preference share are redeemable whereas equity share are not redeemable.
Voting right: the preference shareholders do not enjoy the voting rights whereas the equity shareholders enjoy such right.
Payment of dividend: The preference shareholders have preferential right to get the dividend where equity shareholders do not get such right.
What do you mean by share capital?
The capital collected by a joint stock company for its business operation is known as share capital. It is the total amount of capital collected from its shareholders for achieving the common goal of the company as stated in memorandum of association.
Write the difference types of share capital.
Share capital of a company can be divided into the following different categories:
Authorized or registered or maximum or nominal capital: the maximum amount of capital, which a company is authorized to raise from the public by the issue of shares, is known as authorized capital.
Issued capital: it is a part of authorized capital, which is offered to the public for subscription, including shares offered to the vendor for consideration other than cash.
Subscribed capital: it is the part of subscribed capital, which is called by the Company.
Called up capital: it is the part of called up capital which has been actually paid-up by the shareholders.
Reserve capital: it is that part of uncalled capital which has been reserved by the company by passing a special resolution to be called only in the event of its liquidation.