Company Formation

Meaning of company:

Due to insufficient capital provided by the sole trading concern and partnership organization, the concept of company came into existence. Because of the expansion of the business organization needs huge capital for its continuous operation. Joint stock company fulfils the following requirement from the issue of shares.

A company is an artificial person created by law and terminated by law with perpetual succession and common seal. It is the voluntary association of person with the shareholder having limited liabilities of which share can be easily transferred. It is fully controlled managed by the elected team member from the shareholder known as board of director (BOD) having democratic management. The main source of collecting and raising the capital. It can be also defined simply as the business organization which is established and incorporated as per as company act 2063.

Features and characteristics of the company:

1. Artificial person :- A company is an artificial person created and terminated by law. It can easily sell and purchase the property in its own name .The transfer of ownership can be easily done in case of a public company.

2. Limited Liability :- The liability of shareholders of the company is limited to the face value of the share or the investment made by the shareholder. Any private property cannot be attached to the shareholder whenever the company bears huge loss in case of business operation.

3. Perpetual Succession :- Joint stock company has perpetual existence. It means to say the activities of the company will not stop due to demise, minor age of shareholder, until and unless company goes into liquidation. It is based on continuity assumption.

4. Common Seal :- A company has a separate common seal from others. It defines the logo and symbol of the business which differentiate that attribute, features, and nature regarding function of the company.

5. Transfer of share :- The ownership of the share can be easily transferred from one person to another in case of public limited company however there is restriction on transfer of share in case of private company.

6. Democratic Management :- A company operates its activities from the elected team management known as board of directors. It operates various executive works through a professional person. All the management are based on democratic approach i.e. maximum participation of shareholders in annual general meetings.

7. Unlimited Capital :- Due to insufficiency of capital provided by sole trading concern and partnership form. The concept of company came into existence. A Company collects capital funds from the issue of shares and debenture. It can also raise funds from short term financing like commercial paper, promising note, certificate of deposit.

8. Voluntary association of people :- A company is formed by a group of people known as shareholders having common objectives. There is no objective for the compulsory investment for investors. Company collects capital from the general public with the objective of maximum participation.

Types of company

A) On the basis of incorporation:

a) Chartered company :- The Company which is established by the royal family of the state is known as a chartered company. Such a company does not exist in our company. Ex, East India Company, and the bank of England etc.

b) Statutory company :- Company which is formed under the act of parliament is known as statutory company. Such a company has authority to register other companies. Ex, Nepal Rastra bank, Royal Nepal Airlines Corporation, Nepal oil limited.

c) Registered company :- Company which is established under the company act 2063 is known as Register Company. Such companies are registered under authorization of statutory companies .Ex: Surya tobacco company, NIC-Asia bank, Himal cement factory etc.

B) On the basis of liabilities:

a) Limited liability Company :- Company in which the liability is limited to the share of face value of the share held by them is known company with limited liability. A company in which the liability of the shareholder is limited to the amount of the share held by the shareholder is known as Limited Liability Company by share.

Company in which the liability of the shareholder is extended in writing agreement between shareholder and company itself is known as Limited Liability Company by guarantee. It is applicable only when there is shortage of cash i.e. Loss to the company.

b) Unlimited company :- company in which liability of shareholder is not limited to the face value of the share held by them is known as unlimited liability company .The personal property can be attached in case the company bears huge loss for an unrecovered amount.

C) On the basis of ownership:

a) Governmental company :- Company in which 51% or more share is under the control or ownership of government is known as Governmental Company. Such company can be pure governmental and semi-Governmental

b) Non-Governmental company :- Company in which 49% or less share in under the government ownership is known as non- governmental company. Such companies are private companies by nature.

D) On the basis of numbers:

a) Private company : - Company which has minimum number of members is one and maximum member is 101 for its formation known as private company. In other words, Company which is not public by nature is known as a private company. The word ‘pvt ltd’ must be used at the end of the name of the private company.

There is restriction on transfer of share in case of private ltd company. Such companies cannot commence business operations after getting a certificate of incorporation. There is no need to conduct annual general meetings as well as to publish financial statements physically. Issue of prospectus is not compulsory. Such companies cannot issue shares in the open market.

Features and privileges of a private company :

In a private company the minimum number of members is and maximum is 101.
The word ‘pvt ltd’ is used at the end of the name of a private company.
There is restriction of transfer of shares.
It is not compulsory to conduct an annual general meeting.
It cannot issue shares in the open market.

b. Public company :- A company which is established with minimum number of members 7 and maximum number of members is infinite is known as a public limited company. In the other words, a company which is established under company act 2063 except a private company is known as a public company. The word ‘ltd’ must be used at the end of the name of the public company.

Transfer of shares can be easily possible in the case of a public company. Issue of prospectus is compulsory. it must issue shares in the open market for collection of capital funds . It must hold an annual general meeting and publish financial statements publicly. It can commence its business operations immediately after getting the certificate of incorporation.

Features and privilege of Public company:

In a public limited company, the minimum members number is 7 and maximum is unlimited.
The word ‘ltd’ is used at the end of the name of the public company.
Transfer of share is possible.
Issue of share is necessary through prospectus.
It must conduct an annual general meeting and publish financial statements publicly.

Advantage of a public limited company:

Sufficient capital :- Public company collects its capital from issue of share with maximum participation of general public. It provides huge capital in comparison to private companies.

Limited liability :- The liability of the shareholder of the company is limited to the face value of the share or investment mode by shareholders. It can be either by share and guarantee.

Transfer of ownership :- The ownership of shares in the case of a public company can be easily transferred from one person to another, however, it is restricted to private companies.

Publication of Financial statement :- It is compulsory to issue the financial statement by a public company publicly. Financial statement must be prepared at the end of the accounting year at the time of tax liability determination.

Board of directors :- Public company is formed by the team management with minimum eleven members after incorporation known as board of directors by the board member by appointing a special person for respective post.

E) On the basis of control:

a. Holding company :- A company which holds the majority shares of other companies in the process of takeover is known as a holding company. Minimum 50 % of the share must be held by such a company.

b. Subsidiary company :- A company which is minor i.e. holds a smaller portion of total share of the company is known as subsidiary company. Less than 50% of the shares are held by such companies.

F) On the basis of territory/Area:

a. National company :- A company which operates its financial activities within the geographical boundary of any country is known as National Company.

b. Foreign Company :- A company which operates its financial activities outside the geographical territory of the nation is known as foreign company.

c. Multinational company :- A company which operates its financial activities in various companies is known as a multinational company.

Company promoter:

A group of people who conclude ideas, information, fact finding successions as well as provide the information regarding business opportunity and growth is known as company promoter. They are responsible for memorandum of association, articles of association, and prospectus for the smooth operations of business activities.

Functions of company promoters:

To conclude ideas, suggestions, and fact finding information to the company.
Helps in preparing documents for the company.
Helps in feasibility analysis.
Helps in analyzing the strength and weakness of competitors.

Document of the company:

A) Memorandum of association (MOA) :- Memorandum of association is the company charter which provides detailed information regarding the name, address, and objective of the company. It is the constitution of the company.

Content of the memorandum:

Name of the company,
Address of the company ,
Objective of the company ,
Authorized capital of the company,
Provision regarding liability of the shareholder ,
Maximum amount of capital required for registration.

B) Article of association :- AOA is the internal rules and regulation for managing the operation work. It defines the limit of every personnel working in a company.

Content of AOA:

Rights and duties of directing.
Remuneration and allowance of directions
Provision regarding, Amalgamation of the company
Location in which the company is freshly registered
The capital conversion and refunded at the time of liquidation
Provision related to internal management of the company.

C) Prospectus :- A written formal invitation which is made by the company to the general public for the purpose of share and securities to share subscription in the open market . It includes all the necessary information to meet the temporary objective of the company.

Content of prospectus.

Name of the company
Main objective of the company
Issue of share at par, premium, and discount.
Three years projected income statement and balance sheet
Total number of share issued for subscriptions
Companies shares are classified into issue, subscription, called and paid capital.

Note :-
This note is to help the student in their study not to make them depend upon others.

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Financial accounting || Grade 12 || Accounting