In the modern business world, companies have been the most widely used and effective way to organize and conduct business. A company, regardless of its size, from a small startup to a giant multinational company, is characterized by certain distinctive features that define its legal status, operations, and responsibilities. Understanding these characteristics is very important to entrepreneurs, investors, and professionals involved in corporate affairs. This article goes deeper into the nature of the key characteristics of a company. It also explains what differentiates it from other business forms, such as sole proprietorships and partnerships.

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What is a Company?

A company is that legal entity formed by a number of people with the objective of carrying out business or other activities by way of profit. The company is regarded as a separate legal personality from the owners, and this makes the rights and obligations lie between it and its liabilities. Various laws and regulations relate to the jurisdiction in which a company operates, and companies are usually required to fulfill certain statutory requirements to be in good legal standing.

A company can take any form, like a private limited company, a public limited company, or a limited liability partnership (LLP), depending upon the legal framework under which it is formed. Besides the form, companies have common core features that distinguish them from other structures of business.

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Core Features of a Company

The following characteristics ensure that companies can function efficiently while providing their owners with benefits such as limited liability and separate legal recognition. 

1. Separate Legal Entity

One of the most crucial attributes of any company is the status of being an independent legal person. A company is said to possess a separate identity that is different from those who own it, known as its shareholders. 

Because a company is thus separated, it can:

• Own a property in its own name;

• enter into contracts; 

• sue and be sued; 

• incur debts and liabilities.

This incorporation therefore provides the owners significant legal and financial security; for, the liabilities and debts of the company are completely separate from the shareholders.

2. Limited Liability

One of the salient features of making a firm an attractive business structure is its feature of limited liability. In a company, the shareholders are liable for the debts of the company only up to the amount they have invested in the shares. In simple words, it means that no one is allowed to distribute their assets so that the payment of their debts can be made. In case a company goes into bankruptcy, then the shareholders can lose nothing more than the money invested in purchasing shares.

Personal Risk Protection: The personal assets of the shareholders remain unaffected; therefore, the company is more secure for the people who are investing in it.

3. Perpetual Succession

A company is given the feature of perpetual succession. It continues to generate and exist while changing its membership. Even when a shareholder dies, retires, or leaves the business fraternity, the existence of the company remains the same. Thus, it operates without ever changing due to personal changes in ownership.

Stability and longevity: The operations of the company are not interrupted, and it is easier to involve oneself in long-term ventures.

4. Transferability of Shares

Shares of companies, particularly public limited companies, are transferable. This allows shareholders to sell, buy, or even pass them on to other people with no disruption on the functioning of that company. Private limited companies restrict the transfer of shares, but the whole principle prevails in general.

Flexibility for Shareholders: The shareholders can withdraw from the company or downsize their investment by selling shares.

Ease of Ownership Changes: Ownership can be transferred and will not affect the company's business per se.

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5. Separation of Ownership and Management

In most firms, ownership and control are separated. Shareholders own the company, but they normally elect directors and other executives to manage and control the venture. This way, professional managers can be employed who would have the experience and expertise to run the company properly.

Professional Management: The directors manage the corporation, which means that the shareholders can gain from the experts' management without having to directly manage the firm.

Shareholder Control: Shareholders are in control but only through voting rights on major decisions; they have no say in the running of the company.

6. Artificial Person

An artificial person or corporation is considered a business, which the law recognizes as possessing many of the rights and responsibilities of a natural person in that it can own property, enter into contracts, and act in legal proceedings. However, being not a living person, it needs human agents—that is, directors or managers act on its behalf.

Legal Entity: The company is regarded as a legal person under the eyes of the law, separate and distinct from its owners.

Capacity to Act Separately: It can perform the acts of a natural person and may enter into contracts or may make any agreements.

7. Common Seal: (Optional)

In the past, a business firm had to use only a common seal as a mode of official signature to authenticate an instrument. Although a few countries have made it optional nowadays to use a common seal, it still represents corporate authority in a few countries.

Company Signature was used in signing or authenticating legal documents on behalf of the Company

Optional in Current Practice: Nowadays, the signatures of the directors often instead of using a common seal

8. Capacity to Contract

Being a separate legal person, a company can enter into contracts in its own name and thus carry on business independently of its shareholders. Agreements signed by the directors of the company, being its authorized representatives, are also binding to the company itself.

Contractual Independence: The company may enter into contracts without involving shareholders personally.

Corporate Authority: Contracts and obligations undertaken by the company are its and not those of the owners.

9. Corporate Veil

The legal separateness of the company from the shareholders is known as the corporate veil. This implies that if the company commits some debt or does something against which the government feels it is necessary to take action, that liability doesn't fall on the shareholders. However, in cases where the company has done some fraudulent activities or illegal actions, the court "pierces the corporate veil" and holds the shareholders liable.

Legal Protection: The shareholders are not liable personally for the debts of the corporation.

Exception for Abuse: The court might pierce the corporate veil in cases involving fraud or illegal conduct.

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Conclusion

The characteristics of a company make it the preferred business structure for both entrepreneurs and investors. Limited liability protection, perpetual succession stability, and more provide a strong foundation to conduct business in this economy. Understanding these characteristics assists individuals and organizations in knowing the right decision to make regarding whether to incorporate a company or not.

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Characteristics of a Company FAQs

1. What is the concept of a company being a separate legal entity?

A company is not the same as the owners; it has the capacity to own property, enter contracts, and carry on business in its name. Shareholders are not personally liable for the debts of the company.

2. Why is limited liability relevant in a company?

This feature protects the shareholders from personal financial risk. They are liable only up to the amount they have invested in their shares, and that should not be credited to their assets.

3. What do you understand by perpetual succession?

Perpetual succession refers to a situation where even after a change in shareholders or directors, the company still stays. Its members' death or departure does not have any effect on its operations.

4. Are company shares transferable?

Yes, in most companies, shares are freely transferable from one person to another. This allows shareholders to quit the company or reduce their investment without disrupting the company's operations. In a private company, some restrictions apply.

5. What do you mean by corporate veil?

The corporate veil is the legal fiction that distinguishes a firm from its shareholders. For example, it means that shareholders of a firm will not be personally liable to one of its creditors for such debts, although courts may "pierce the veil" in the event of fraud.