Corporate and Other Laws · Preliminary

Meaning and Characteristics of a Company

Updated 4 October 2026 · Fact-checked

A company is an artificial legal person formed and registered under company law. Its key features are separate legal entity, perpetual succession, limited liability, transferable shares, common seal or authorised signature, and capacity to sue and be sued. To answer, state the feature, explain it, then support it with a case or example.

Understand Meaning and Characteristics of a Company

A company is an association of persons that the law treats as a person in its own right once it is registered. It is not a human being. It is an artificial juristic person. It exists because the law says it exists.

The most important idea is the separate legal entity. After incorporation, the company and its members are two different persons in law. The company owns the assets. The company owes the debts. A shareholder owns shares, not the company's property. The well-known case on this point is Salomon v. Salomon & Co. Ltd., decided by the House of Lords. It held that a validly incorporated company is a separate person from its members, even if one man holds almost all the shares.

From this one idea, other features follow. Because the company is a separate person, it continues even if members die or leave. This is perpetual succession. Because the debts are the company's debts, a member of a company limited by shares is liable only up to the unpaid amount on his shares. This is limited liability. Because the shares belong to the member, he can generally transfer them. This is transferability of shares. A public company's shares are freely transferable. A private company restricts the right to transfer in its articles.

A company also has the power to own property in its own name, to sue and be sued in its own name, and to enter contracts through its agents. As an artificial person it cannot act itself. It acts through its directors and other authorised persons. A company is also not a citizen, although it can have residence and nationality for some purposes.

Compare it with other forms. A partnership firm is not a separate legal entity under the Partnership Act. Partners have unlimited, joint and several liability. An LLP is a body corporate and a separate legal entity with perpetual succession. Its partners' liability is limited to their agreed contribution, except for their own wrongful acts or fraud. Do not mix these up in the exam.

Key rules to remember

Separate legal entity: Company ≠ its members; After registration, the company owns assets and owes debts in its own name. Members hold shares only. Cite Salomon v. Salomon & Co. Ltd.
Perpetual succession: Death, insolvency or exit of members ⇒ no effect on the company's existence; The company ends only by a legal process such as winding up or striking off, not by a change in membership.
Limited liability (company limited by shares): Maximum liability of member = unpaid amount on shares held; For a fully paid share, the member has no further liability to the company.
Minimum members on conversion of existing entity: Section 366(2): company consisting of two or more members; section 366(2)(vii): a company with less than seven members shall register as a private company; Section 366(1) says that, for this Part, the word company includes a partnership firm, LLP, cooperative society, society or any other business entity formed under any other law that applies for registration under this Part. Section 366(2)(vii) says a company with less than seven members shall register as a private company. These are the express words of the Act. Sub-section (2) is worded for a company formed under an Act of Parliament or other law, and it does not itself name a firm. So when you apply (vii) to a firm, present it as your application of section 366(1) and (2)(vii), not as wording the Act states for firms. State these as rules for registration under this Part by existing entities. Do not state them as a rule for fresh incorporation.
Assent for an existing company registering under this Part: Section 366(2)(iv): assent of a majority of members present in person, or by proxy where proxies are allowed, at a general meeting summoned for the purpose. Section 366(2)(v): where a company whose members' liability is not limited by any Act or other law is about to register as a limited company, the majority must be not less than three-fourths of the members present in person or by proxy at the meeting; A firm whose partners have unlimited liability and which registers as a limited company falls in the case of proviso (v). It needs assent at a meeting summoned for the purpose, and the majority must be not less than three-fourths of the members present in person or by proxy where proxies are allowed. Section 366(1) brings a firm within the word company for this Part. Do not say the firm's assent is only 'as prescribed'. Section 374(d) separately requires compliance with other prescribed conditions. Proviso (i) also bars a company registered under the Indian Companies Act, 1882 or 1913 or the Companies Act, 1956 from registering under this section.
LLP conversion to company: Section 374 proviso: LLP is deemed dissolved on registration as a company; No further act or deed is needed for the LLP's dissolution.

How to solve Meaning and Characteristics of a Company questions

Use the same pattern for every question on meaning and features of a company, whether it asks for a list, a case analysis or a comparison.

1Read the question and mark its type: define, list features, apply a feature to a case, or compare entities.
2Open with a one-line definition: a company is an artificial juristic person with separate legal existence, created by registration.
3Name each feature as a heading in your answer, then give one or two lines of explanation.
4Support the main feature, separate legal entity, with Salomon v. Salomon & Co. Ltd. and state the holding in a line.
5For a case-based question, identify the feature tested, state the rule, apply it to the facts, then conclude.
6For comparison questions, use the same points for each entity: legal status, liability, continuity, transfer of interest, number of members.
7Close with a clear conclusion that answers the exact question asked.

Quickest way: Feature-Rule-Apply in four lines

When to use it: Use when time is short, especially for 4-5 mark written questions and for MCQs on features.

MCQ trick: if an option says a company is not a separate person from its members, or that members own the company's assets, eliminate it.
MCQ trick: if an option says a partnership firm has a separate legal entity under the Partnership Act, eliminate it.
Written format: Feature, then Meaning in one line, then Case or example, then Effect on the facts given.
Always write the short conclusion line, since step marks are given for the conclusion tied to the facts.

Common mistakes in Meaning and Characteristics of a Company

Saying a member owns the company's assets in proportion to his shares.
Students think shareholders are owners in the ordinary sense.
Fix: Write that the company owns its assets. The member owns only shares, which are his own property.
Saying limited liability means the company's liability is limited.
The words are used loosely.
Fix: Write that the liability of the members is limited, to the unpaid amount on shares or to the guaranteed amount in a company limited by guarantee.
Saying a partnership firm is a separate legal entity like a company.
Business practice treats the firm as a unit.
Fix: State that under the Partnership Act the firm is not a separate person. Partners are jointly and severally liable without limit.
Saying an LLP has no separate legal identity because it has partners.
The word partner suggests a partnership.
Fix: Write that an LLP is a body corporate with separate legal identity and perpetual succession, and that partners' liability is limited to their contribution.
Saying all shares in every company are freely transferable.
Students remember the feature from public company examples.
Fix: Write that shares are transferable, subject to the articles. A private company restricts the right to transfer.
Quoting the number of members for fresh incorporation when answering on registration of existing entities.
Section 366 text is confused with general incorporation rules.
Fix: For existing entities registering under this Part, cite section 366(2)(vii): a company with less than seven members shall register as a private company. For a firm or LLP, add that section 366(1) includes it in the word company for this Part. Keep this separate from the rules for fresh incorporation.

Worked examples

Example 1

Mr. Rao holds 9,990 of the 10,000 shares of Rao Traders Pvt. Ltd. and the rest are held by his family. The company's warehouse is destroyed by fire. A supplier is owed ₹8,00,000 by the company, and the company has no funds. The supplier sues Mr. Rao personally for the amount. Examine whether Mr. Rao is liable.

Show the solution

Identify the feature: the question tests separate legal entity and limited liability.
State the rule: once incorporated, a company is a separate legal person from its members. Its debts are its own. A member's liability is limited to the unpaid amount on his shares.
Cite the case: in Salomon v. Salomon & Co. Ltd., the House of Lords held that a validly incorporated company is a separate person even where one member holds nearly all the shares.
Apply: the supplier's contract is with Rao Traders Pvt. Ltd., not with Mr. Rao. His large shareholding does not make him the owner of the company's assets or debts.
Check the shares: the facts do not say any amount is unpaid on his shares, so no further liability to the company arises. The facts also give no sign of fraud, so the veil of incorporation is not lifted.
Conclude on the exact question asked.

Answer: Mr. Rao is not personally liable for the ₹8,00,000. The debt is the company's. The supplier can claim only against the company and its assets. Mr. Rao's liability, if any, is limited to any unpaid amount on his shares.

Example 2

A partnership firm with five partners wishes to convert into a company under the Companies Act, 2013 by registering under this Part. State the main conditions you would check, and explain the type of company it must be if it has five members.

Show the solution

Identify the law: the firm is an existing business entity and the question concerns registration under this Part. Section 366(1) says the word company, for this Part, includes a partnership firm which applies for registration under this Part.
Check the member count: section 366(2) refers to a company consisting of two or more members, and section 366(2)(vii) says a company with less than seven members shall register as a private company. Five is less than seven. Sub-section (2) does not name a firm, so present the application to the firm as following from section 366(1), not as wording the Act states for firms.
Note the assent condition: section 366(2)(iv) requires assent at a general meeting summoned for the purpose. The partners' liability is not limited by any Act or other law, and the firm is about to register as a limited company. So section 366(2)(v) applies, and the majority must be not less than three-fourths of the members present in person, or by proxy where proxies are allowed, at the meeting. Do not claim the assent for a firm is only as prescribed.
Check obligations under section 374: secured creditors must have consented or given no objection. The firm must publish an advertisement in a newspaper, one in English and one in a vernacular language, seeking objections. It must file a notarised affidavit from all members or partners that the necessary documents will be submitted to the earlier registering authority for dissolution of the firm. It must also comply with other conditions as prescribed under section 374(d).
Conclude.

Answer: With five members, the firm must register as a private company, since a company with less than seven members must register as private under section 366(2)(vii), applied to the firm through section 366(1). Its assent must be given at a general meeting summoned for the purpose under section 366(2)(iv). Because the partners' liability is unlimited and it is registering as a limited company, the majority must be not less than three-fourths of the members present in person or by proxy under section 366(2)(v). It must also comply with section 374: creditor consent or no objection, newspaper notice in English and a vernacular language, a notarised affidavit from all partners for dissolution of the firm, and the other prescribed conditions.

Exam tips

For a list question, write the feature name first and the explanation after it. The examiner scans for headings.
Always include Salomon v. Salomon & Co. Ltd. when asked about separate legal entity, with the holding in one line, but avoid adding details of the case you are unsure about.
Draw a comparison table in your answer sheet for company vs partnership vs LLP. Use the same five points for each entity so the comparison is easy to mark.
In MCQs, read for words such as only, always and all. Share transferability, for instance, is subject to the articles, so an option saying shares are always freely transferable is wrong.
For application questions, do not stop at stating the feature. Tie it to the facts and write a one-line conclusion.

Practice questions from Preliminary

Meaning and Characteristics of a Company in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Meaning and Characteristics of a Company: frequently asked questions

What are the main characteristics of a company for CA Intermediate?

The main ones are separate legal entity, perpetual succession, limited liability of members, transferability of shares, ability to own property and to sue and be sued in its own name, and acting through agents. Write each as a short heading with a line of explanation. Support separate legal entity with Salomon v. Salomon & Co. Ltd.

What did the Salomon case decide?

It held that a company validly incorporated under the Act is a legal person separate from its members. This remains true even if one person holds almost all the shares and controls the company. So the company's debts are its own and not the members' personal debts.

What is the difference between a company and a partnership firm?

A company is a separate legal entity with perpetual succession and limited liability of members. A partnership firm is not a separate person under the Partnership Act. Its partners are jointly and severally liable without limit, and the firm's continuity can be affected by changes in partners.

How is an LLP different from a company?

Both are separate legal entities with perpetual succession. An LLP is governed by its LLP agreement and the LLP Act, and its partners' liability is limited to their agreed contribution. A company is governed by the Companies Act and has members who hold shares and a board of directors.

Does a company have limited liability or do its members?

The members have limited liability. In a company limited by shares, a member is liable only for the unpaid amount on his shares. The company itself remains fully liable for its own debts, up to all of its assets.