6 Characteristics and Definition of the Company in Sense of Corporate Governance ~ Corporate Governance Articles

What is a company?

A company is a form of business ownership with the following characteristics:
1. Its capital consists of several units, called shares, each of a small nominal value, which are sold to a large number of people.  People holding shares in a company are its members and are called shareholders. They are part owners of the company.  In USA, it is not uncommon for shares to have a zero nominal value. A company may sell its shares at nominal value, or above or below it, depending on the demand for such shares.
2.  The  shares  of  a  company  are  generally  freely  transferable  (though  there  may  be  some formalities  involved  in  case  of  certain  types  of  companies).  Transfer of shares from one person to another has no effect on the company.  The company receives the share proceeds only when it sells shares to the shareholder.  If the shareholder subsequently sells these shares to another person, the transaction is strictly between these two persons and usually no part of the sale proceeds goes to the company.  Free and unrestricted transferability of shares is one of the prime causes of popularity of this form of business ownership.
3. The shareholders, being a separate entity from the company, have no liability towards the debts of the company.  However, they are obligated to the company to the extent of the par value of shares held by them.  In other words, the liability of shareholders towards their company  is  limited  to  the  face  value  of the  shares  held  by  them.  The implication is that should  the  company  fail  to  pay  its  debts  and  face  liquidation,  the  company  cannot  ask 11 shareholders  to contribute anything  more  than  the  face  value  of  their  shares  towards Payment of the company’s liabilities. And if a shareholder has already paid to the company the full nominal value of the shares held by him, he cannot be asked to contribute anything further towards payment of company’s debts.  This feature has made companies the most popular form of business ownership for concerns that require a large capital base and carry a high degree of risk.
4. A Company is considered a legal person and has an entity of its own, quite separate from its Members or shareholders.  In the eyes of the law, a shareholder and his company are two Separate entities, neither responsible for the conduct or obligations of the other.
5. A Company is deemed to have indefinite life, i.e.  A perpetual existence.  Death of, or change in, shareholders does not affect the existence of a company.  Unlike a partnership which automatically  terminates  if  a  partner  dies  or  leaves  the  firm,  a  company  (being  an independent,  separate  legal  person)  continues  to  exist  regardless  of  any  changes  in  its Shareholders.
6.  The  management  of a  company is  entrusted to  people  called  directors  who  are  elected by Shareholders.  Directors are eventually answerable to the shareholders. While it is common for  directors  to  be  shareholders,  it  is  theoretically  possible  that  shareholders  may  elect  a Non-member as director of the company.  Directors, however, do not run the company on a Day to day basis. They hire a team of professionals to carry out the day to day management of the company.  Some directors may be a part of such a management team.  Hence, the Team running a company should be seen as having two distinct layers: the first tier is Board of Directors that essentially makes policies and supervises the working of the second tier.
The second tier is commonly known as management that takes directions from and reports To the Board of Directors and runs the company on a day to day basis.