THE FEATURES OF A COMPANY

Various forms of doing business

A sole trader is an individual who owns and runs his or her own
business. The law does not recognize the business: the law recognizes
only the
individual who runs it. The individual is liable for the debts of the
business
and is also personally liable for any breaches of the law by the
business.
A partnership is a group of individuals who own and run their own
business. Each partner contributes capital to the business. A
partnership business is not recognised as a person by the law.
Individual partners are personally liable, jointly with the other partners,
for the debts of the business.
Most companies are companies limited by shares. The capital of a
company is represented by shares, and the ordinary shareholders are
its owners. Companies Ordinance 1984 may refer to shareholders who
are owners of the company as members of the company.

Companies are created by a process established by The

Companies Ordinance 1984. A company must also have a written
constitution(Termed as Memorandum of Association-Explained
later in this book,
Partnerships often have a constitution in the form of a partnership
agreement, but this is not a legal requirement.)
Unlike sole traders and Partnerships, a company is a legal person,
separate from its owners. This is the doctrine of corporate
personality. The law recognises a company as a person, with
legal rights and obligations similar to those of ordinary individuals.
Companies are managed by their directors, who should be
members of the company as well (with a few exceptions). In small
companies, the shareholders and directors may be the same
individuals, but in large companies, the directors might hold a
small proportion of the shares or even no shares at all.
Any legal person can own shares in a company. This includes
other companies. It is very common in practice for some
companies to own some or all of the shares of other companies.

Separate legal personality

It is important to understand what separate legal personality means.
The law
regards a company as a person, separate from its owners. For
example, suppose
that Mr X sets up a limited company, New Company with ten shares
of Rs. 10
which he owns. Mr X the individual and New Company, for the
purpose of the
law, would be two separate persons - both would have a separate
legal
existence.
A company is an artificial person, whereas individual people are
natural
persons. Essentially, however, the law treats persons in the same
way, whether
they are artificial or natural.
Because it is a person, a company can enter into contractual
agreements
with other persons individuals or companies.

If a company is owed money, the debtor owes the money to the

company,
and not to its owners.
A company is personally liable to pay tax on its income (profits).
If a company breaks the law, it is usually the company itself that is
liable,
although there are circumstances in which its owners or its officers
(mainly
directors) may be personally liable.
The effects of separate legal personality
The separate legal personality of companies has several
consequences:
limited liability of the owners of business
separation of ownership from control i-e members and directors
Transfer of ownership and perpetual succession/perpetual
existence.

Limited liability

The concept of limited liability applies to the owners (shareholders) of

a
company. The liability of the owners of a company for the debts of
the company
is limited to the amount of their investment in the company. If a
company is unable to pay its debts, it may be forced into liquidation.
The assets of the company will then be used to pay some of its
unpaid liabilities. However, the shareholders of the company will not
be required personally to pay
the remaining unpaid debts of the company. The shareholders will
lose what they
have invested, but will not be required to pay any more.
In this respect, limited companies are very different from
partnerships. Limited
liability applies to all limited companies.
This is why private limited companies in the country are required to
include
the word (Private) Limited in their name.
It is also why public companies in the country are required to include

The liability of a company itself and its directors

Limited liability applies to the shareholders of a company. It does not
apply to the company itself. A company is fully liable for all its debts and
other liabilities; just as any other person is fully liable for the debts that
he or she incurs. The directors and other officers of a company act on
behalf of the company, and provided that they act within their powers
and in accordance with the law, they will not be personally liable for
debts of the company.
Transfer of ownership and perpetual succession
Another feature of the separate legal personality of a company is that its
shareholders can transfer their share in the ownership of the company to
someone else, but this change of ownership does not affect the company
in any way. Shareholders can transfer some or all of their shares to
another person (who may be a natural person or an artificial person). The
most common methods of share transfer are sale, gift and inheritance.
Shares can also be transferred by putting them into trust. When shares
are transferred, the rights associated with the shares, such as the right to
receive a portion of any dividend paid by the company or the right to
attend and vote at general meetings of the company, are transferred to
the new owner. However, the transfer of shares does not affect the legal
status or legal existence of the company. The company continues to exist
and its existence is unaffected by the change in share ownership.

In practice, it is common for shares to be transferred many times

during the life of
a company. Some companies have been in existence for many years,
during which time its ownership has changed many times. The
company has continued,
even when its owners have changed. This phenomenon is called
perpetual
succession or perpetual existence.

TYPES OF COMPANIES

Company [Section 2(7)]

Companies Ordinance 1984 defines a company as a Company registered
under this Ordinance or any existing company.
Existing Company [Section 2(15)]
An existing company means any company registered under any act or
Ordinance
governing the registration or formation of companies prior to the
promulgation of
the Companies Ordinance 1984.
Body corporate [Section 2(4)]
"Body corporate" or "corporation" includes a company incorporated
outside Pakistan, but does not include
A corporation sole; or
A co-operative society registered under any law relating to the
registration of co-operative societies; or
Any other body corporate, which the Federal Government may specify
in this
behalf.

Companies limited by shares, companies

limited by guarantee and unlimited companies
[Section 2(8), Section 2(9) and Section 15]
Limited liability may be in the form of a company limited by shares or a
company limited by guarantee. With a company limited by shares, the
limited liability of its owners is restricted, in law, to the face value of the shares
they own. This is the limited liability described above. With a company limited
by guarantee, its owners may or may not have shares. Their share of the
ownership of the company is recognized, and they are members of the
company. Their liability to the company is limited to an amount that the member
guarantees to contribute in the event that the company goes into liquidation for
a company not having share capital and for a company having share capital this
shall also include the amount of share capital he subscribed to the company. It is
also possible to register a company as an unlimited company. This has all the
advantages of a normal company except that the liability of its members is not
limited. In practice unlimited companies are fairly rare but are sometimes used
by a partnership style business. Businesses that incorporate as companies are
companies limited by shares. The great advantage of this form of company is
that the company is able, if the shareholders approve, to raise additional capital
by issuing new shares. (Companies limited by guarantee are not able to raise
capital in this way. A company limited by guarantee is a form often used by
charities, trade associations and private members sports clubs, where the club
is owned by the members).

Private company and public company [Section 2(28)]

Private Company
Private company is of two types; Single Member Company and other
than Single
Member Company.
Single Member Company It is a company which consists of a
single member who is also the director of the company. These
companies are governed by special rules implemented by Securities
& Exchange Commission of Pakistan for such companies. In these
companies (SMCPVT) Limited is added to the name of the company.
Private Company (Other Than Single Member Company)
Such type of
a company can be registered by at least two members and it restricts
The maximum number of members to fifty, members jointly
holding shares shall be counted as one member,
The right to transfer the shares by its members,
The invitation of subscriptions from general public for its shares or
other securities.

Public listed company and unlisted company [Section 2.(30)]

Public company
Public company means a company which is not a private company it can
take two
forms:
- Public listed company
- Public unlisted company
Public listed company [Section 2(20)]
Such form of public company whose securities are listed on an exchange
and they are traded as per regulations of that stock exchange.
Public unlisted company
Public unlisted companies have not made an offer of their shares to
general public hence there shares are not traded on a stock exchange. A
public unlisted company however is entitled to make an offer to the
general public as and when it thinks fit unlike private companies which
are forbidden to invite subscriptions from general public.

Holding company and subsidiary company [Section 3]

Holding Company
It means a company or body corporate which holds (directly or
indirectly) more than fifty percent (50%) in the voting securities of
any other company, or has a power to elect and appoint majority of
the directors of such other company. Holding company can be
defined in context only of subsidiary company.
Subsidiary Company
It means a company or body corporate whose more than fifty percent
(50%) voting securities are held or controlled (directly or indirectly),
by some other company or such other company has a power to elect
and appoint majority of the directors of such company.