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Characteristics (Features) of a company
- The certificate of incorporation of a company is issued by registrar of companies as per procedure/guidelines given in the Companies Act, 2013. The law considers a company as an artificial legal person.
- A Company is a separate legal entity from its owner (shareholders).
- A company has perpetual existence, not affected by the death, lunancy or insolvency of its shareholders. It can be wounded up only by the law (Court or registrar of company.)
- Every company has it own common seal, which act as the official signature of the company.
- The shares of a company is transferable subject to certain conditions (e.g. some conditions for private company.)
- The company is managed by the ‘Board of Directors’, the directors are representative of the shareholders (owners). So, management and ownership are separate in company organization.
- The liability of a shareholder is limited upto the nominal price of shares subscribed by one.
Types of Companies
- Private Company – Section 2 (68) of the Companies Act, 2013 defines “A private Company means a company which has a minimum paid up capital of Rs. 100,000 and which by its Articles of Association –
(a) restricts the right to transfer its shares;
(b) limits the number of its members to 200 excluding its part or present
(c) Prohibits any invitation to public to subscribe for any of its securities.
- Public Company – According to section 2 (71) of the Companies Act, 2013 a public company means a company which is not a private company and has a minimum paid up capital of L 500,000 or higher capital as may be prescribed a private company which is a subsidiary of a company not being a private company shall be deemed a public company.
- One Person Company – Section 2 (62) of the Companies Act, 2013 states one person company is a company which has only one person as a member. Rule 3 of the Companies (In Corporation) Rules, 2014 provides that (i) only on Indian citizen resident in India can form one person company (ii) Its paid up capital is not more than 50 lakhs; (iii) Its Average annual turnover should not exceed Rs. 2 crores; (iv) It cannot carry out Non banking financial Investment activities.
Class / Types of Shares : There are two classes of shares
- Preference shares : The shares which get preferential right in respect of :
(a) Right of dividend
(b) Repayment of capital on winding up of the company.
- Equity shares : The shares which are not preference shares are called equity shares and do not get preference in above respect.
Types OR Classes of Preference Shares
(a) With Reference to Dividend :
- Cumulative Preference shares : Cumulative preference shares are these preference shares, the holders of which are entitled to receive arrears of dividend before any dividend is paid on equity shares.
- Non-cumulative Preference shares : Non-cumulative preference shares are those preference share, the holders of which do not have the right to receive arrear of divided. If no dividend is declared in any year due to any reason. Such shareholders get nothing, nor they can claim unpaid dividend in any subsequent years.
(b) With Reference to Participation
- Participating preference shares : such shares, in addition to the fixed preference dividend, carry a right to participate in the surplus profit, if any, after providing dividend at a stipulated rate to equity shareholders.
- Non-Participating preference shares : Such shares get only a fixed rate of dividend every year and do not have a right to participate in the surplus profit.
(c) With Reference to Convertibility
- Convertible preference shares : are those preference shares which have the right/option to be converted into equity shares.
- Non-convertible preference shares : are those preference shares which do not have the right/option to be converted into Equity shares.
(d) With Reference to Redemption
- Redeemable preference shares : are those preference shares the amount of which can be redeemed by the company at the time specified for their repayment or earlier.
- Irredeemable preference shares : are those preference shares the amount of which cannot be refunded by the company unless the company is wound up. Now a company cannot issue irredeemable preference shares.
Prospectus : It is an invitation to public for subscription of shares or debentures.
Capital : means amount invested in the business for the purpose of earning revenue. In case of company money is contributed by public and people who contributed money are called shareholders.
Share Capital: Capital raised by issue of shares is called share capital.
Authorised Capital: Also called as Nominal or registered capital. It is the maximum amount of capital a company can issue. It is stated in Memorandum of Association.
Issued Capital: This is part of authorized capital which is offered to public for subscription. It cannot exceed authorized capital.
Called Up Capital: It is the amount of nominal value of shares that has been called up by the company for payment by the subscriber towards the share.
Paid Up Capital: It is part of called up capital that the members of company or shareholders have paid.
Reserve Capital: It is part of increased capital and/or portion of uncalled share capital of an unlimited company which can be called only in case of winding up of the company.
Capital Reserve: It is capital profit not available for distribution as dividend. It is represented in balance sheet of company as Reserves and Surplus under the heading Shareholder’s Funds.
Issues of Shares At Premium: It is issue of share at more than face value.
This premium can be utilized for : (Section 52)
- Issue of fully paid bonus shares to the shareholders.
- Write off preliminary expenses of the company.
- Writing off securities issue expenses commission paid discount on issue of securities.
- For providing the premium payable on redemption of Redeemable preference shares or debentures of the company.
- For Buy back of its own shares as per Section 68.
Journal Entries for accounting of securities premium, the securities premium may be collected by the company with application money / Allotment money / First call/Final Call depend upon the terms of issue of shares. If questions is silent regarding the securities premium amount due, it is assumed that securities premium money is due with the allotment money. Following are the various situation of securities premium received with application, allotment and call.