Things you should know about a company before investing in it

Before you invest in a company, you should know not only how it generates revenue, but also how it uses your money. TheCompanies Act, 1956, regulates a firm's affairs and protects the interests of minority shareholders. Here are some legal attributes of a company you should be familiar with. LEGAL STRUCTURE OF A COMPANY Termination A company does not die a natural death. It is created and terminated by law through a procedure of winding up. Most companies use alternatives like reorganisation, reconstruction or amalgamation to avoid termination. Perpetual succession The company being an entity created by law remains unaffected by the death or departure of a member. Its membership keeps changing without affecting its continuity. As defined by its terms, the firm's life may be unlimited or continue for a specified period for a particular task. Limited liability The liability of shareholders is limited to their contribution to the firm's shares. If ashareholder has shares that aren't fully paid for, his liability will not exceed the unpaid amount. If he has fully paid shares, there's no liability even if the firm is declared insolvent. Corporate personality A company is distinct from individuals who are its members, like shareholders, creditors, etc. It's a separate legal entity and bears its own name and seal. It can own property, incur debts and borrow money. Shareholders cannot be held accountable for the firm's acts. VITAL DOCUMENTS OF INCORPORATION

Articles of association These are bylaws, or rules and regulations, that govern the management of its internal affairs. It defines the mode in which the business needs to be carried on and members' rights and duties.The articles of association are subordinate to the memorandum. Memorandum of association It is a document that lays the constitution of the company and contains the fundamental provisions on which the company is incorporated. The purpose of this document is two-fold. First, it helps the intended shareholder to determine the purpose for which his money will be used and enables him to assess the investment risk. Secondly, any person dealing with the company will know without doubt the legally permitted range of the firm's activities. Both memorandum and articles are public documents and anyone can access these on payment of a nominal fee.
CLASSIFICATION OF COMPANIES ON THE BASIS OF THEIR INCORPORATION, COMPANIES CAN BE CLASSIFIED AS: Statutory company These companies are formed by a special act of parliament or state legislature. They are not governed by the provisions of the companies act, 1956. Examples include RBI and LIC. Registered company Most firms trading on the stock exchanges are registered companies. These are registered with the registrar of companies (RoC) and governed by the provisions of the Companies Act, 1956. ON THE BASIS OF REGISTRATION, COMPANIES CAN BE CLASSIFIED AS: Private company Such a company is prohibited to invite deposits from the public and restricts the transfer ability of its shares. The Companies Act, 1956, confers certain privileges on such firms by exempting them from complying with some provisions of the Act. The reasons for exemption are negligible

public interest in its affairs. Public company Such a firm has a minimum paid-up capital of Rs 5 lakh and there is no restriction on the transferability of shares. Any member of the public willing to pay the price can buy its shares or debentures. The shares are quoted on the stock exchange. Due to the high level of public interest, the provisions of the Companies Act are applicable to these firms. IMPORTANT LEGAL TERMS Doctrine of ultra vires This rule is meant to protect shareholders and creditors. The doctrine states that any act not stated in the memorandum is prohibited. This implies that a company cannot indulge in any act or contract that is beyond the powers defined in the memorandum. If a company enters into a contract that is ultra vires, it will be considered null and void and the shareholder has the right to ask for his money. Piercing through the corporate veil The corporate personality of a company must be used for legitimate purposes. If a fraudulent or dishonest use is made, the court will determine the people involved in unlawful acts. Such individuals will not be allowed to hide behind the corporate personality. The principle cannot be used by shareholders for their own purposes. The acts for which the principle is used include tax evasion or fraud.