Grade 12 Account Note

Company Accounts: Company And Its Formation

Company:
Company is an artificial person created by law to carry on a business for the profit with distinct legal existence. The company has transferable shares, limited liabilities, perpetual succession & a common seal. The company is managed by the representatives of shareholders called board of directors. In other words “company is a voluntary association of individuals for profit having capital divided into transferable shares the ownership  is the condition of membership”. According to Nepal Company Act 2053 “A Company refers to any company formed and registered under this act”.

 

Characteristics of a company:
The main characteristics of a company are as follows:

Legal personality: A company is an artificial person, which is created by law. It exists only incontemplation of law and, therefore, has no physical shape or form. Although invisible and intangible, as a legal person, it enjoys almost all the rights of a natural person. It has the rights to enter into contracts and it can buy and sell the properties in its own name. It can be sue and can be sued.

Perpetual existence: Being an independent body, the life of the company is not connected with the life of its shareholders. The law creates the company and the law brings it to an end. It is a corporate body. Its shareholders may transfer their shares and new persons may come in their place but the existence of the company is not affected.

Limited liability: The limited liability is another important features of a company. If anything goes wrong with the company, the shareholder’s liability is limited by the amount of the shares held by him. In other words, other than the money one has invested, one cannot be called upon to pay even a single paisa more out of one’s pocket in order to meet the company’s obligations.

Democratic management: A company is a democratic organization. The decisions are taken in the annual general meeting and the board meeting by following the principles of democracy. The board is elected and dismissed according to the interest of the majority of shareholders.

Transferability of shares: The shares of a company are transferable except in the case of private limited companies. The shares, especially of a public limited company, are easily transferable form one person to another without prior permission of the company management. A shareholder can convert his shares into cash easily either by selling or transferring the shares to other persons. This transfer of shares changes the ownership but does not affect the regular functioning of the company.

Common seal: As the company has no physical form, it cannot sign any contract in its name. Therefore, originally, all documents and contract papers require the affixing of the seal. Most of the transactions are signed by the directors who act as agents of the company. It uses a common seal for its official signature. Therefore, any document without common seal of the company is not taken into consideration and the company is not liable for the same.

 

Types of company:

The various types of companies based on their nature are as follows:

Company promoters:

Company promoters are the people who give birth to a company. Promoters generate the idea and discover business opportunities. They make detailed investigation about the feasibility of the business, financial sources and competitors. They prepare necessary document like the Memorandum of Association,  the Article of Association and the prospectus for the incorporation of the company. The promoters may be anybody such as an entrepreneur, a professional promoter, government and financial institutions. The main functions of promoters are as follows:

To develop the idea of starting a business.
To investigate and verify the feasibility of the business.
To select the name and the site of the business.
To determine the objectives of the business.
To prepare necessary documents for its registration.
To make the plan of financial sources.

Main documents of a company:
Some important documents are required and prepare to submit to the office of company register in the process of formation of a company. Some of these important documents are as follows:

#In case of private limited company:

i)Memorandum of Association
ii)Article of Association

#In case of public limited company:

i)Memorandum of Association
ii)Article of Association
iii)Prospectus

 

Article of Association:

Article of Association is another important document for establishment of the company. It relates with the internal rules and regulations of the company. It contains rules, regulations and by laws for the internal management of the company. Every company has to prepare articles of association along with other documents for incorporations. Matters related in the Article of Association should not be against the Memorandum of Association. Any content of Article of Association which disagree with the Memorandum of Association shall be invalid to the extent of such conflict. It shows the relation between the company and its member and relation among the members.
 

According to the Company Act 2053, the Articles of Association contains the following:
Number of directors and their terms and conditions.
The amount of minimum subscription by directors.
Matters relating to the procedure of calling company’s meeting and notice to be given for meeting.
Director’s remuneration and allowance.
Rights and duties of the managing directors.
Provisions relating to the rules and regulations of internal management.
Other necessary particulars.

 

Memorandum of Association:

 Memorandum of Association is the first document in which the main objective and external rules and regulations of the company will be stated. It is the constitution of a company. The company should operates as per the terms and conditions mentioned in the MOA. If the company does not operate as per the MOA, it will be considered as illegal. In case of private limited company, at least , one promoter and in case of public limited company at least seven promoters have to sign on the MOA.
According to Lord Macmillan “The Memorandum of Association sets out the constitution of the company. It is, so to speak the charter of the company and providers the foundation on which the structure of the company is built.”

 

The main contents of the Memorandum of Association are as follows:
The name of the company.
The name of the place where the company’s registered office is situated.
The objectives of the company.
The liability clause of shareholders.
The amount of capital of the company.
Other necessary particulars.

 

Prospectus:

Prospectus is another major important document of the company. Simply, prospectus is the brief report of the company. In other words, Prospectus is an invitation to the general public to participate or purchase the shares of the company. We know that public limited company will manage the capital from the general public by issuing the shares. The prospectus should not be signed by the all the directors, but the prospectus which is to be published should be approved by the concerned department of Government of Nepal.

 

The main objectives of Prospectus are as follows:

Information about the company to the general public.
Initiation of interest from the public for investment by purchasing shares.
Creation of confidence towards company to the general public.
Make the general public aware about the terms and conditions for purchasing shares.


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