Chief Justice Marshall of the U.S.A. has defined a company as “a person-artificial, invis­ible, intangible and existing only in the eyes of law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its existence”.

Thus, a joint stock company is an association of persons having a separate legal existence, perpetual succession and common seal. Its capital is divided into shares which are freely transferable and the owners of these shares have limited liability. The distinctive features of the company form of organization are as follows:

1. Separate legal entity:

A company has a distinct legal entity independent of its mem­bers. It can own property, make contracts and file suits in its own name. Shareholders are not the joint owners of the company’s property.


A shareholder cannot be held liable for the acts of the company. Similarly, members of the company are not its agents. There can be contracts between a company and its members. A creditor of the company is not a creditor of its members.

The separate legal entity of a company was recognised in the famous case of Salomon, v. Salomon and Co. Ltd. The facts of the case were as follows:

Salomon formed a company which acquired his own shoe business. He took all the shares except six shares which he distributed among his wife, daughter and four sons. Salomon also purchased some debentures of the company which gave him a charge over its assets.

At the time of winding up, the company’s assets were not sufficient enough to pay its debts. The creditors of the company (other than Salomon) argued that their debts should be cleared before paying Salomon for his debentures because Salomon and the company was one and the same person.


The Court decided that after incorpo­ration, Salomon and Co. had an identity separate from Salomon even though he owned virtually all the shares in the company.

2. Perpetual succession:

A company is a creation of the law and only the law can bring an end to its existence. Its life does not depend on the life of its members. The death, insolvency or lunacy of members does not affect the life of a company. It continues to exist even if all its members die. Members may come and go but the company goes on until it is wound up.

3. Limited liability:


As a company has a separate legal entity, its members cannot be held liable for the debts of the company. The liability of every member is limited to the nominal value of the shares bought by him or to the amount of guarantee given by him.

For instance, if a member has 50 shares of Rs 10 each, his liability is limited to Rs 500. Even if the assets of the company are insufficient to satisfy fully the claims of the creditors, no member can be called up to pay anything more that what is due from him. However, if the members of the company so desire, they may form a company with unlimited liability.

4. Transferability of Shares:

The capital of a company is divided into parts. Each part is called a share. These shares are generally transferable. A shareholder is free to withdraw his membership from the company by transferring his shares. However, in actual prac­tice some restrictions are placed on the transfer of shares.


5. Common Seal:

Being an artificial entity, a company cannot act and sign itself. There­fore, it acts through human beings. All the acts of the company are authorised by its common seal.

The company seal is affixed on all important documents as a token of the Company’s approval. The common seal is the official signature of the company. Any document which does not bear the common seal of the company is not binding on the company.

6. Separation of Ownership and Control:


Members have no right to participate directly in the day-to-day management of a company. They elect their representatives, called directors, who manage the company’s affairs on behalf of the members. Thus, the own­ership of a company is distributed among the shareholders while management is vested in the board of directors.

Q. 6. Give three points of distinction between company and partnership.

Ans. (i) A company is formed through registration while a partnership is formed through an agreement.

(ii) A company is a separate legal entity but a partnership is not a separate legal entity.


(iii) Liability of members of a company is generally limited whereas the liability of partners in a partnership firm is generally unlimited.