The compilation of these Accounting for Share Capital Notes makes students exam preparation simpler and organised.
Features of a Company, Kinds of Company, and Share Capital of a Company
Features of the company as per the Indian companies act 1956, define a company or corporate body. A company has certain very unique features and characteristics. Let us familiarize ourselves with the features of a company, kinds of company, and Share Capital of the Company.
List of Feature of Company as per Indian Companies Act 1956
- Incorporated Association
- Separate Legal Entity
- Limited Liability
- Transferability of Shares
- Perpetual Existence
- Common Seal
Let us take a look at these features one by one.
1. Incorporated Association
A company is required to be registered under the Companies Act 2013. Any association of persons that is not registered and subsequently incorporated with the Registrar of Companies is not recognized as a company at all.
2. Separate Legal Entity
A company in the eyes of the law is distinct (separate) from the people who constitute it. It is capable of enjoying rights is also subject to duties under the law. A company can also own and deal in property and other such assets. One point to be noted is that the company is not the agent or the trustee of the subscribers, it has its own distinct legal identity.
3. Limited Liability
Since a company has its own legal identity, its members are not liable for its debts. The liability of the members of a company is limited to the unpaid share of their share value. There are some companies limited by guarantee, where the liability of each member is determined by such a guaranteed amount.
4. Transferability of Shares
The shares held by a shareholder of a company are transferable by nature. So the ownership in a company can be transferred in accordance with the manner provided in the Articles of Association. In a private company, there may be some restrictions placed on the transfer of shares. But the right is not taken away completely.
5. Perpetual Existence
A company is an artificial person, so it does not have a restricted span of life. Death, insolvency, insanity, retirement etc of any or even all of its members does not affect the status of a company.
6. Common Seal
Directors of a company are essentially its agents. So when a director acts within his powers a company is bound by his actions. The Common Seal is like a signature of the company. The directors use the seal to sign documents on behalf of the company. So until there is such a seal on the documents, they cannot be enforced.
Kinds of Company
Broadly there are two types of companies on the basis of the number of members, a private company, and a public company. But other than this classification, there are other kinds of companies. These are classified on the basis of the liabilities of their shareholders. The kinds of a company are as follows,
1. Companies Limited by Shares
Here the liability of members is limited by the nominal value of their shares. So if the shares owned by him are fully paid up, then he has zero liability. If the shares are not fully paid up, he can be called to pay up the balance amount in case of liquidation of the company.
2. Companies Limited by Guarantee
Some companies are limited by guarantee. This means that the members agree to an amount that they will pay in case of liquidation, i.e. a guaranteed amount. Such liability will only rise if the company is being winded up.
3. Unlimited Liability Companies
Here the members of the company are personally liable for the losses of the company. So in case of liquidation, the assets of the company are not enough to cover its debts, then the members have to pay the balance. Even their private property can be attached. Such kinds of companies are actually not found in India.
Share Capital
Share capital means the capital of a company divided into “shares”. These shares are of a fixed amount and are generally in multiples of 5 or 10. So share capital is basically the contributions made by all the shareholders of a firm. Since a capital account cannot be opened for every single shareholder, we club this amount in the share capital account.
From an accounting point of view, there are certain categories of share capital. They are as follows
1. Authorized Share Capital
Also known as Nominal or Registered Share Capital. It is the sum of money stated in the Memorandum of Association as the share capital of the company. It is the maximum amount of capital the company can raise by issuing shares
2. Issued Capital
This is the portion of the nominal capital which the company has issued for a subscription. This amount of capital is either less than or equal to the nominal capital, it can never be more.
3. Subscribed Capital
This is the part of the issued capital that has been subscribed by the shareholders. It’s not necessary that the whole of the issued capital will receive subscriptions, but at least 90% of issued capital should be subscribed generally.
4. Called up Capital
The company may not always call up the full amount of the nominal value of shares. The amount of the subscribed capital called up from the shareholders is the called up capital, which is less or equal to the subscribed capital.
5. Paid-up Capital
This is the amount paid for the shares subscribed. If the shareholder does not pay on call, it will fall under “calls of arrears”. When all shareholders pay their full amounts paid-up capital and subscribed capital will be equal.
6. Reserve Capital
The capital reserved by a company, to be used in the event of winding up of the company.
Example:
Question:
The portion of the capital not yet called up by the company is
a. Uncalled Capital
b. Calls in Arrears
c. Reserve Capital
d. None of the above
Answer:
The answer is “a”.
The portion of the capital that the company has not demanded yet is Uncalled Capital. The company may collect such an amount at any time it needs the funds or wants to build a reserve capital.