What a Company Is
Chapter Thirty-Seven
Syllabus topic 1, "Meaning of Company, Types of Company, Maintenance of Books of Accounts"
Pages 111 to 113 of 168
In one line
A company is an association of persons registered under the Companies Act 2013, which on registration becomes a body corporate distinct in law from its members.
The definition MU expects
Section 2(20) is short and circular on purpose.
"Company" means a company incorporated under this Act or under any previous company law.
The definition tells you the route, not the nature. It says a company is a thing that has been registered. What that registration produces is in section 9, which says that from the date in the certificate of incorporation the subscribers and all later members shall be a body corporate by the name in the memorandum, capable of exercising all the functions of an incorporated company, having perpetual succession, with power to hold property and to contract, and capable of suing and being sued.
So read the two together in an answer. Section 2(20) is the definition; section 9 is what the definition gets you.
The features that follow
| Feature | Where it comes from | What it means in the books |
|---|---|---|
| Separate legal personality | Section 9, body corporate | The company's assets are its own, not the members'; the members' private accounts are nowhere in its balance sheet |
| Perpetual succession | Section 9, in terms | Death or retirement of a member changes nothing in the accounts; there is no revaluation, no goodwill adjustment, no new firm |
| Limited liability | Section 2(22) and section 4(1)(d) | A member owes only the unpaid amount on the shares, so calls in arrears are a receivable and nothing beyond them can be demanded |
| Capacity to hold property and contract | Section 9 | Property stands in the company's name, and a contract with a member is a real contract |
| Capacity to sue and be sued | Section 9 | Litigation is the company's, and a provision for it is the company's provision |
| A common seal, where used | Optional since 2015 | A document may be signed by two directors, or a director and the secretary, instead |
Perpetual succession is the feature that separates this module from the first two. In Modules I and II you dissolved a firm because its constitution changed. A company's constitution does not change when its members do, which is why there is no realisation account anywhere in Module IV.
How a company is formed: section 3
Section 3(1) says a company may be formed for any lawful purpose by:
| Persons required | Company formed | |
|---|---|---|
| (a) | Seven or more | A public company |
| (b) | Two or more | A private company |
| (c) | One person | A One Person Company, which is a private company |
They form it by subscribing their names to a memorandum and complying with the Act's requirements for registration.
Section 3(2) then says the company so formed may be limited by shares, or limited by guarantee, or an unlimited company. Those three are the liability classes, and the next chapter takes them with the rest of the types.
What a Company Is
What happens if the members fall below the minimum: section 3A
Section 3A is the provision students forget, and it is worth knowing because it looks like an exception to limited liability.
If the number of members falls below seven in a public company or below two in a private company, and the company carries on business for more than six months while so reduced, then every person who is a member during that time after the six months and knows the fact becomes severally liable for the whole of the debts contracted during that time, and may be severally sued for them.
Three conditions, all of which must hold: the reduction, more than six months of trading in that state, and the member's knowledge. Limited liability is not lost by the reduction itself, only by continuing to trade knowingly.
The memorandum: section 4
Section 4(1) sets out what the memorandum must state, and the accounting student needs four of them.
| Clause | What it states | Why it matters to the accounts |
|---|---|---|
| (a) Name | Ending in Limited, or Private Limited for a private company | The name at the head of every financial statement |
| (b) Registered office | The State in which it is to be situated | Section 128 requires the books to be kept at the registered office |
| (c) Objects | What the company is incorporated to do | Revenue from operations means revenue from these |
| (d) Liability | Limited or unlimited, and if limited, how | Limited by shares means limited to the amount unpaid on the shares; limited by guarantee means the amount each member undertakes to contribute on winding up |
Section 4(1)(d)(i) is the sentence to quote for limited liability, because it says exactly what the limit is: the amount unpaid, if any, on the shares held.
The financial year: section 2(41)
A company's financial year ends on 31 March. Section 2(41) says so in terms, and adds that where a company is incorporated on or after 1 January, its first financial year runs to 31 March of the following year, so that a first period may be up to fifteen months but never longer.
This is the section behind Module III. The period from acquisition to incorporation and the period after it together make up a financial year defined by this clause, which is why the two are computed and reported as one year's result.
What a financial statement is: section 2(40)
Section 2(40) says a financial statement includes:
What a Company Is
- a balance sheet as at the end of the financial year;
- a profit and loss account, or for a not-for-profit activity an income and expenditure account, for the financial year;
- a cash flow statement for the financial year;
- a statement of changes in equity, if applicable; and
- any explanatory note annexed to or forming part of any of them.
With a proviso that matters: for a One Person Company, a small company and a dormant company the financial statement need not include the cash flow statement.
Notice that the notes are part of the financial statement, not an appendix to it. That single word governs the whole of the chapter on notes to accounts later in this module.
What to write in the exam
If asked to define a company, give section 2(20), then say what registration produces under section 9, then list the features with the sections against them. A definition alone is worth about two marks; the features carry the rest.
If asked for the features of a company, the six in the table above, each in two sentences: what it is, and what follows from it.
Do not write that a company must have a common seal. It has not been compulsory since the 2015 amendment, and the Act now allows signature by two directors, or by a director and the company secretary, in its place.
The line to remember
A company is not the people who own it. Everything else in Module IV is bookkeeping for that proposition.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.