In law, a company refers to a legal entity formed which has a separate legal identity from its members, and is ordinarily incorporated to undertake commercial business. Although some jurisdictions refer to unincorporated entities as companies, in most jurisdictions the term refers only to incorporated entities. It has been judicially remarked that the word company has no strictly legal meaning, but is taken to mean a specific form of entity created under the laws of the relevant jurisdiction. Because of the limited liability of the members of the company for the companys debts and the separate personality and tax treatment of the company, it has become the most popular form of business vehicle in most countries in the world.
Lacking a concise definition of their own, companies are often defined by reference to what they are not.
Companies are separate and distinct from:
Trusts, although conceptually trustees managing a trust fund for the benefit of beneficiaries are in many ways to similar to the directors managing the companys assets for the benefit of the shareholders.
Unincorporated associations of persons, such as clubs, cooperatives and collectives.
Modern companies are generally formed for one of three purposes:
non-profit companies, formed for social, charitable or quasi-charitable purposes to provide the sponsors with the benefit of limited liability and to form an administratively convenient mechanisms for the administration of the organization.
small business companies, usually formed by either sole traders or partners to take advantage of limited liability and (sometimes) as a means of tax avoidance, whilst still retaining overall control in the hands of the founders.
public investment companies, formed to enable members of the public to invest in a business or enterprise without actually becoming involved in the running of it (which is left to the board of directors).
However, companies have a number of other uses. They are not normally subject to rules against mortmain or perpetuity, and may have perpetual existence. Companies are often used in tax structuring. Companies, being commercial entities, are often easier to utilize in financing arrangements than partnerships and individuals. Companies have an inherit flexibility which can let them grow; there is no legal reason why a company initially formed by a sole proprietor cannot eventually grow to be a publicly listed company, but a partnership will generally always be limited as to the maximum number of partners.
Although some forms of the companies are thought to have existed during Ancient Rome and Ancient Greece, the closest recognizable ancestors of the modern company did not appear until the second millennium. The first recognizable commercial associations were medieval guilds, where guild members agreed to abide by guild rules, but did not participate in ventures for common profit. The earliest forms of joint commercial enterprise under the lex mercatoria were in fact partnerships.
But with the expansion of international trade, Royal charters were increasingly granted in Europe (notably in England and Holland) to merchant adventurers. The Royal charters usually conferred special privileges on the trading company (including, usually, some form of monopoly). Originally, traders in these entities traded stock on their own account, but later the members came to operate on joint account and with joint stock, and the new Joint stock company was born.
Early companies were purely economic ventures; it was only belatedly realized that an incidental benefit of holding stock was that the companys stock could not be seized for the debts of any individual member.
The development of company law in Europe was hampered by two notorious bubbles (the South Sea Bubble in England and the Tulip Bulb Bubble in Holland) in the 17th century, which set the development of companies in the two leading jurisdictions back by over a century in popular estimation.
But companies, almost inevitably, returned to the forefront of commerce, although in England to circumvent the Bubble Act 1720 investors had reverted to trading the stock of unincorporated associations, until it was repealed in 1825. However, the cumbersome process of obtaining Royal charters was simply insufficient to keep up with demand. In England there was a lively trade in the charters of defunct companies. However, prevarication amongst legislation meant that in England it was not until the Joint Stock Companies Act 1844 that the first equivalent of modern companies, formed by registration, appeared. That legislation shortly preceded the railway boom, and form there the numbers of companies formed soared.
The last significant development in the history of companies was the decision of the House of Lords in Salomon v. Salomon & Co. where the House of Lords confirmed the separate legal personality of the company, and that the liabilities of the company were separate and distinct from those of its owners.
In a December 2006 article, The Economist identified the development of the joint stock company as one of the key reasons why Western commerce moved ahead of its rivals in the Middle East in post-renaissance era.
Further Information: Corporation: Origins
There are various types of company that can be formed in different jurisdictions, but the most common forms of company are:
A company limited by shares. The most common form of company used for business ventures.
A company limited by guarantee. Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise they have no economic rights in relation to the company.
A company limited by guarantee with a share capital. A hybrid entity, usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return.
An unlimited liability company. A company where the liability of members for the debts of the company are unlimited. Today these are only seen in rare and unusual circumstances.
The foregoing types of companies are generally formed by registration under applicable companies legislation. Less common seen types of companies are:
Charter Corporations. Prior to the passing of modern companies legislation, these were the only types of companies. Now they are relatively rare, except for very old companies that still survive (of which there are still many, particularly many British Banks), or modern societies that fulfill a quasi regulatory function (for example, the Bank of England is a corporation formed by a modern charter).
Statutory companies. Relatively rare today, certain companies have been formed by a private statue passed in relevant jurisdiction.
Companies formed by letters patent. Most corporations by letters patent are corporations sole and not companies as the term is commonly understood today.
In legal parlance, the owners of a company are normally referred to as the members. In a company limited by shares, this will be the shareholders. In a company limited by guarantee, this will be guarantors.
Some offshore jurisdictions have created special forms of offshore company in a bid to attract business for their jurisdictions. Examples include segregated portfolio companies and restricted purpose companies.
There are however, many, many sub-categories of types of company which can be formed in various jurisdictions in the world.
Companies are also sometimes distinguished for legal and regulatory purposes between public companies and private companies. Public companies are companies whose shares can be publicly traded, often (although not always) on a regulated stock exchange. Private companies do not have publicly traded shares, and often contain restrictions on transfers of shares. In some jurisdictions, private companies have maximum numbers of shareholders.
Further Information: Types of companies.
In almost every jurisdiction in the world, a company must have a corporate constitution, which defines the existence of the company and regulates the structure and control of the company.
By convention, most common law jurisdictions divide the corporate constitution into two separate documents:
The Memorandum of Association (in some countries referred to as Articles in Incorporation) is the primary document, and will generally regulate the companys activities with the outside world, such as the companys objects and powers and specify the authorized share capital of the company.
The Articles of Association (in some countries referred to as the by-laws) is the secondary document, and will generally regulate the companys internal affairs and management, such as procedures for board meetings, dividend entitlements etc.
In many countries, only the primary document is filed, and the secondary document remains private. In other countries, both documents are filed. Some countries provide statutory forms of basic corporate constitution which a company may adopt (for example, Table A in the United Kingdom).
In civil law jurisdictions, the companys constitution is normally consolidated into a single document, often called the charter.