03. the company

The question

The forms examined so far, the sole trader and the partnership, share in their basic forms a single great limitation: they interpose no separate legal person between the business and those who own it, and so expose the owners to unlimited personal liability. The company overcomes this limitation, and it is for that reason the dominant form of business organisation in the modern economy. This sub-unit examines the company, asking what it is, how it comes into being, how ownership and management are arranged within it, and what its principal types are. The two great consequences of the company's separate personality, limited liability and the rest, are drawn out in the sub-unit that follows; the present sub-unit establishes what the company is and how it is structured. The answer introduces the juridical person of Course 1 in its most important commercial form.

The company and its incorporation

A company is a juridical person, created by law, through which a business may be carried on, distinct in law from the persons who own and manage it. The company is the principal modern example of the juridical person that Course 1 introduced: it is an artificial person, brought into being by a legal process, capable of holding property, making contracts, suing, and being sued in its own name, and existing as a legal subject separate from its members. The company is, in this respect, the device by which the law creates a person to carry on a business, a person distinct from the human beings behind it.

This creation is effected through incorporation, the legal process by which a company is brought into existence, ordinarily by registration with a public official or registry under the law that governs companies, upon the filing of the documents that constitute the company and the satisfaction of the statutory requirements. Incorporation connects to the analysis of legal personality and its sources in Course 1, for it is the act by which the law confers personality upon the company, marking the moment at which a new legal person comes into being. From that moment the company exists as a person in law, separate from its incorporators, and continues in existence until it is dissolved, irrespective of changes in its membership, so that it may outlive the individuals who formed it and may continue unchanged as its members come and go. The formality of incorporation is the price of the separate personality the company enjoys, in contrast to the informality of the sole trader and the partnership, which create no separate person.

Consider a group of individuals who wish to carry on a business through a company. They incorporate the company by filing the required documents with the companies registry, and upon registration the company comes into existence as a legal person, separate from them. The company, not the individuals, then owns the business assets, makes the business contracts, and owes the business debts, and it continues to exist as the individuals' involvement changes. The example shows incorporation creating a new legal person through which the business is carried on.

The company is therefore a juridical person, created by the process of incorporation, through which a business may be carried on by a person distinct in law from its owners and managers, and the formality of incorporation is what brings this separate person into being and distinguishes the company from the unincorporated forms.

The share and the shareholder

Ownership of a company is divided into shares, and the holder of a share is a shareholder, also called a member of the company. The share is the unit of ownership and represents a bundle of rights against the company, ordinarily including the right to a portion of the company's profits when distributed, the right to a portion of its assets on a winding up after its creditors are paid, and the right to participate in certain decisions of the company by voting. The shareholder owns the share, and through the share has an interest in the company, but does not own the company's assets directly, for those belong to the company as a separate person.

This structure connects to the distinction between real and personal rights examined in Course 1 and to the separate personality of the company. The shareholder's right is a right against the company, a personal right of the kind Course 1 described, rather than a direct right in the company's assets; the company owns its assets, and the shareholder owns a share, which is a distinct item of property representing a claim against the company. This separation has important consequences: the shareholder may transfer the share, dealing in the ownership of the company without disturbing the company's own property and contracts, and the shareholder's creditors may reach the share but not the company's assets, just as the company's creditors may reach the company's assets but not, in the ordinary case, the shareholder's other property, a point the next sub-unit develops as limited liability. The share thus makes the ownership of a business transferable and divisible in a way the unincorporated forms cannot match, allowing capital to be raised from many investors each holding shares.

Suppose an investor buys shares in a company. The investor becomes a shareholder, with the right to dividends when declared, to a share of the surplus on a winding up, and to vote on certain matters, but the investor does not own the company's factory or its stock, which belong to the company. The investor may sell the shares to another, transferring the interest in the company without affecting the company's assets or contracts. The example shows the share as a transferable unit of ownership conferring rights against the company rather than in its assets.

The share is therefore the unit into which ownership of a company is divided, conferring on the shareholder rights against the company rather than direct rights in its assets, and this structure, resting on the company's separate ownership of its property, makes the ownership of a business transferable and divisible and allows capital to be raised from many shareholders.

The management of the company

The shareholders own the company, but they do not, as such, manage it; the management of a company is ordinarily entrusted to its directors, who are charged with conducting the company's business, and who act collectively as the board of directors. This separation of ownership from management is a characteristic feature of the company, distinguishing it from the partnership in which the owners ordinarily manage, and it allows the company to be owned by many investors while being managed by a smaller body chosen for the purpose.

This arrangement connects to the law of agency examined in Module 03 and to the nature of the juridical person. The company, being an artificial person, can act only through human beings, and the directors are the principal human agents through whom the company acts, forming its decisions and directing its affairs; the directors and other officers and employees act as the company's agents in the sense Module 03 examined, binding the company within their authority. Because the directors manage assets and a business that belong to the company and ultimately to the shareholders, the law imposes on directors duties owed to the company, in particular duties of loyalty and of care, requiring them to act in the company's interests and with proper diligence, and constraining the use of the power that management confers. The separation of ownership from management makes possible the large company owned by dispersed shareholders, while the duties imposed on directors address the risk that those who manage may not always act in the interests of those who own.

Imagine a company with many shareholders who have neither the time nor the expertise to run its business. The shareholders elect directors, who form the board and manage the company, making its commercial decisions and binding it in its dealings as its agents, while owing the company duties to act loyally and carefully. The shareholders retain ultimate control through their power to elect and remove directors and to decide certain fundamental matters, but the conduct of the business rests with the board. The example shows the separation of ownership from management and the role of the directors as the managers and agents of the company.

The management of the company is therefore entrusted to its directors, acting as the board, who manage the company's business as its agents and owe it duties of loyalty and care, a separation of ownership from management that enables the company to be owned by many and managed by few while constraining the managers through the duties the law imposes.

The types of company

Companies are of several types, and distinguishing the principal ones clarifies the range of the form. The most important distinction, drawn in broadly similar ways across the traditions, is between the private company and the public company. The private company is designed for businesses with a limited and closed body of members, such as a family business or a joint venture; it is commonly restricted in its ability to offer its shares to the public, and its shares are not freely traded. The public company is designed for businesses that raise capital from the public at large; it may offer its shares to the public and, when listed on a stock exchange, has its shares traded freely, and it is subject to more extensive requirements of disclosure and regulation in return for access to public investment.

This distinction connects to the function of the company in raising capital and to the regulation of markets examined later in the course. The private company suits the closely held business, offering the separate personality and limited liability of the company without the burden and exposure of public capital-raising; the public company suits the business that requires capital from many investors, offering access to the public market at the cost of greater regulation and disclosure, which protect the investing public. Companies are further distinguished by whether the liability of their members is limited by shares, limited by guarantee, or unlimited, and by whether they are formed for profit or for other purposes, but the private and public company are the principal commercial types, and the choice between them turns on whether the business will raise capital from the public. The detail of these types and their requirements varies by jurisdiction, and a person forming a company must attend to what the governing law provides.

Consider a closely held business with a few owners who do not wish to raise money from the public; a private company suits it, providing separate personality and limited liability with relatively light regulation. Consider a business that needs to raise large amounts of capital from many investors; a public company suits it, allowing it to offer shares to the public and to be listed for trading, at the cost of the disclosure and regulation that protect those investors. The example shows the private and public company serving the closely held and the publicly financed business respectively.

The types of company are therefore distinguished principally by the division between the private company, suited to the closely held business and restricted from offering shares to the public, and the public company, suited to the business that raises capital from the public and subject to greater regulation in return, the choice turning on the manner in which the business is to be financed.