Business Laws and Management · Elements of Company Law

Meaning and Characteristics of a Company under the Companies Act

Updated 11 October 2026 · Fact-checked

Under section 2(20) of the Companies Act, 2013, a company means a company incorporated under that Act or any previous company law. Its key features are separate legal entity, perpetual succession, limited liability, common seal, transferable shares, and the capacity to own property and to sue and be sued. Match each exam fact to one feature.

Understand Meaning and Characteristics of a Company

A company is an artificial person created by law. It is formed by registration, not by birth. Because the law gives it a personality, it can own assets, enter contracts and be taken to court in its own name.

The Act does not describe a company by its features. Section 2(20) simply says a company means a company incorporated under this Act or under any previous company law. So the test is incorporation. An unregistered group of people doing business is not a company. Examples of previous company laws listed in section 2(67) include the Companies Act, 1956 and the Indian Companies Act, 1913.

The features come from the idea of legal personality. Separate legal entity: the company is distinct from its members. If you hold shares in an Indian company, the company's assets are not yours and its debts are not yours. The landmark case on this point is Salomon v Salomon & Co. Ltd., where the company was held to be a separate person even though Salomon controlled it almost entirely.

Perpetual succession: the company continues even when members die, retire or transfer shares. Only winding up under the law ends it. Limited liability: in a company limited by shares, section 2(22) says the liability of members is limited by the memorandum to the amount, if any, unpaid on the shares they hold. Once your shares are fully paid, you owe nothing more.

Other features follow. A company has a common seal as its official signature in many older texts, but it is not compulsory today, so read the question carefully. Shares of a public company are freely transferable, while a private company must restrict transfer in its articles (section 2(68)). A company can own property in its own name and can sue and be sued in its own name. Remember also that being a legal person is not the same as being a citizen.

Key formulas to remember

Definition of company: Company = company incorporated under the Companies Act, 2013 or any previous company law (section 2(20)); The test is incorporation, not the number of people or the type of business.
Company limited by shares: Member's liability = amount unpaid on shares held (section 2(22)); If shares are fully paid, the liability is nil.
Company limited by guarantee: Member's liability = amount undertaken to contribute if the company is wound up (section 2(21)); Liability is fixed by the memorandum.
Separate legal entity: Company ≠ its members; Salomon v Salomon & Co. Ltd. is the landmark case.
Perpetual succession: Death or exit of members ⇒ company continues; Only legal winding up ends its existence.
Private company features: Restricts transfer of shares + member limit of 200 (except One Person Company) + no public invitation for securities (section 2(68)); Joint holders count as one member. Present and past employee-members are not counted.

How to solve Meaning and Characteristics of a Company questions

Use this method for definition, feature and case-based questions on a company.

1Read the question and find the fact that is being tested, such as a debt, a death of a member, ownership of property or a share sale.
2Name the matching feature: separate entity, perpetual succession, limited liability, transferability of shares or property ownership.
3State the rule in one line, for example: the company is a person distinct from its members.
4Apply it to the facts. Say who is liable: the company, the member, or nobody beyond unpaid share money.
5For definition questions, quote section 2(20): incorporated under this Act or any previous company law.
6In written answers, add Salomon v Salomon & Co. Ltd. for separate legal entity, then give a conclusion in one line.

Quickest way: Fact to feature matching

When to use it: Use this in the OMR paper, where each MCQ gives about one minute.

Underline the key fact in the question.
Match: debts of company ⇒ separate entity; member dies ⇒ perpetual succession; unpaid share money ⇒ limited liability.
Eliminate options that confuse a company with a partnership or with its members.
Pick the option that states the rule exactly; watch words like only, always and every.

Common mistakes in Meaning and Characteristics of a Company

Saying members own the company's assets.
Students think shareholders are owners in the ordinary sense.
Fix: Remember the company owns its property. Members own shares, not specific assets.
Thinking limited liability means a member never pays anything.
The word limited is read as zero.
Fix: A member remains liable for the unpaid amount on shares held. Only when fully paid is nothing more due.
Treating perpetual succession as meaning the company can never close.
Perpetual sounds like forever.
Fix: It means changes in membership do not end the company. Winding up under law can still end it.
Saying a company is a citizen or has the rights of a natural person in every respect.
Legal person is confused with human being.
Fix: A company is an artificial legal person. It cannot do acts that need a natural person, such as marrying.
Quoting a wrong section for the definition of company.
Several definitions in section 2 look similar.
Fix: Link section 2(20) with company, 2(21) with guarantee, 2(22) with shares, 2(68) with private and 2(71) with public company.

Worked examples

Example 1

Ravi holds 100 fully paid shares of ₹10 each in Sundar Textiles Ltd., a company limited by shares. The company is wound up with debts of ₹50,00,000 and no assets. How much must Ravi pay towards the debts?

Show the solution

Identify the feature: limited liability under section 2(22).
Liability = amount unpaid on shares held.
Shares are fully paid, so the unpaid amount = ₹0.
The company is a separate person, so its debts are not Ravi's debts.

Answer: Ravi must pay nothing. The creditors can claim only against the company.

Example 2

Meena holds 200 shares of ₹10 each in Kaveri Foods Ltd., on which ₹6 per share has been paid. The company is wound up and the shareholders are asked to pay what remains on their shares. How much is the maximum Meena can be asked to pay?

Show the solution

Unpaid amount per share = ₹10 − ₹6 = ₹4.
Number of shares = 200.
Maximum liability = 200 × ₹4 = ₹800.
She cannot be asked for more, even if the company's debts are larger.

Answer: ₹800

Exam tips

In MCQs, the usual traps are options that make members liable for company debts or say the company ends on a member's death. Reject both.
Learn the section numbers 2(20), 2(21), 2(22), 2(68) and 2(71). Questions often test them.
For a written answer, give the feature name, the rule, the application and a short conclusion.
Read statements with always or never closely. Many features have conditions, such as transfer of shares in a private company.

Practice questions from Elements of Company Law

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 is the definition of company under section 2(20)?

Section 2(20) says a company means a company incorporated under the Companies Act, 2013 or under any previous company law. So registration under company law is what makes it a company.

What does separate legal entity mean?

It means the company is a legal person distinct from its members. It owns its assets, owes its debts and can sue or be sued in its own name. Salomon v Salomon & Co. Ltd. is the case used to explain this.

Is a common seal compulsory for a company?

The common seal is traditionally seen as the company's official signature, but it is not compulsory in present law. Answer according to the wording of the question, and do not state it as a mandatory requirement.

Does limited liability protect members in every situation?

Not in every situation. Members are liable up to the unpaid amount on their shares, or the guarantee amount in a guarantee company. In some cases the law may disregard the separate entity, which is studied under lifting the corporate veil.