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 company’s 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:
- sole proprietorships
- trusts, although conceptually trustees managing a trust fund for the benefit of beneficiaries is in many ways similar to the directors managing the company’s 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 utilise in financing arrangements than partnerships and individuals. Companies have an inherent 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.