Everything you need to know about the types and classification of companies. The company is the most effective vehicle yet discovered to manage and control modern business enterprise.
Other forms of organisation may outnumber it, but most business is transacted by companies.
In fact, the company pervades the economic and social life all over the world, because of so many advantages it enjoys over other forms of organisation.
The companies are classified on the basis of following categories:-
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A. Mode of Incorporation B. Liability of Members C. Control D. Ownership E. Nationality F. Transferability of Shares G. Public Interest H. Functional Standpoint I. Control J. Nationality K. Formation L. Involvement of Public Money M. Share Holding Pattern.
Some of the types of companies are:-
1. Private Company 2. Public Company 3. Holding and Subsidiary 4. Associate 5. Listed 6. Foreign 7. One Person
8. Small 9. Government 10. Dormant 11. Statutory 12. One Person 13. Company Limited by Guarantee 14. Company Limited by Shares
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15. Chartered 16. Registered or Incorporated 17. Unlimited Liability 18. Non-Government 19. Indian 20. Multinational 21. Deemed to be Public Company 22. Limited Liability.
Types and Classification of Companies: 22 Major Types
Types of Companies – 11 Types (Explained with laws)
The most popular types of companies are public arid private company. But there are number of basis for classification of Companies.
These are as follows:
Type # 1. Private Company:
According to section 2(68) of the Companies Act, 2013 (as amended in 2015), “private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles—
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(i) restricts the right to transfer its shares;
(ii) Except in case of One Person Company, limits the number of its members to two hundred. Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member.
In this computation, the following shall not be included in the number of members:
(a) Persons who are in the employment of the company; and
(b) Persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased.
(iii) Prohibits any invitation to the public to subscribe for any securities of the company.
The additional provisions in relation to private company are:
(a) A private company limited by shares must have articles containing aforesaid three restrictions.
(b) The minimum number of members in private company shall be two, except in case of One Person Company.
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(c) A private company must add the word “Private” in its name.
Type # 2. Public Company:
According to Section 2(71) of the Companies Act, 2013 (as amended in 2015),”public company” means a company which—
(a) Is not a private company;
(b) Has a minimum paid-up share capital as may be prescribed-
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Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.
The additional provisions in relation to public company are:
(a) A public company must have a minimum of seven members and there is no restriction on maximum number of members.
(b) A public company having limited liability must add the word “Limited” at the end of name.
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(c) The shares of public company are freely transferable.
Companies Limited by Shares:
According to Section 2(22) of the Companies Act, 2013, “company limited by shares” means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them. It is clear this type of company must have share capital.
Companies Limited by Guarantee:
According to Section 2(21) of the Companies Act, 2013, “company limited by guarantee” means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.
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According to Section 2(92) of the Companies Act, 2013, “unlimited company” means a company not having any limit on the liability of its members. It is a company incorporated with or without a share capital and where the legal liability of the members or shareholders is not limited. It means the members have unlimited obligation to meet any insufficiency in the assets of the company in the event of the company’s liquidation. So, the liability arises only upon the winding up.
Therefore, prior to any such formal liquidation of the company, any creditors or security holders of the company may have recourse only to the assets of the company, not those of its members or shareholders.
Until such an event occurs (formal liquidation), an unlimited company is similar with its counterpart, the limited company, in which its members or shareholders have no direct liability to the creditors or security holders of the company during its normal course of business or existence.
The additional provisions in relation to unlimited company are:
(a) It means the members have unlimited obligation to meet any insufficiency in the assets of the company so as to enable settlement of liability in the event of the company’s formal liquidation. So, the liability arises only upon the winding up.
(b) Therefore, prior to any such formal liquidation of the company, any creditors or security holders of the company may have recourse only to the assets of the company, not those of its members or shareholders.
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(c) Until such an event occurs (formal liquidation), an unlimited company is similar with its counterpart, the limited company, in which its members or shareholders have no direct liability to the creditors or security holders of the company during its normal course of business or existence.
Type # 3. Holding and Subsidiary Company:
Section 2(46) of Companies Act, 2013 provides that a “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. As per section 2(87) “subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company—
(i) Controls the composition of the Board of Directors; or
(ii) Exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies- Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.
Explanation:
(a) A company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;
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(b) The composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
(c) The expression “company” includes anybody corporate;
(d) “Layer” in relation to a holding company means its subsidiary or subsidiaries.
Type # 4. Associate Company:
As per section 2(6), “Associate Company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. For the purposes of this clause, “significant influence” means control of at least twenty per cent of total share capital, or of business decisions under an agreement.
Type # 5. Listed Company:
As per section 2(52), “listed company” means a company which has any of its securities listed on any recognized stock exchange.
Type # 6. Foreign Company:
As per section 2(42), Foreign company means any company or body corporate incorporated outside India which—
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(a) Has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) Conducts any business activity in India in any other manner.
The foreign company has to furnish to the Registrar of Companies, for registration, the specified documents within 30 days from the establishment of place of business in India. These documents include certified copy of charter, list of directors and secretary of the company, full address of the registered or principal office outside India and within India, etc.
Under the Companies Act, no other formality is required for a foreign company. However, under section 29 of the Foreign Exchange Regulation Act, 1973, a foreign company is required to obtain the general or special permission of the Reserve Bank of India for carrying on any activity of a trading, commercial or industrial nature.
Type # 7. One Person Company:
The Companies Act, 2013 provides a new type of business entity in the form of company wherein only one person may be allowed to form a company. The act empowers Central Government to provide for a simpler compliance rules for OPC and small companies. Under section 2(62), One Person Company (OPC) means a company which has only one person as a member. The OPC is also a private company.
Thus, all the provisions, as are applicable to private company, shall also apply to OPC. But there are certain provisions of the Act and the Rules which are applicable only to OPC and not to all private companies.
The following specific provisions are applicable to OPC:
(a) The Memorandum must be subscribed by one person.
(b) The Memorandum shall state the name of a person, who, in the event of death or incapacity of the member of the company.
(c) The words ‘One Person Company’ shall be mentioned in brackets below the name.
(d) The OPC shall have one member only.
Type # 8. Small Company:
Section 2(85) of the Companies Act, 2013 defines “small company” means a company, other than a public company—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or
(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees.
It has also been provided that nothing in this clause shall apply to:
(A) A holding company or a subsidiary company;
(B) A company registered under section 8; or
(C) A company or body corporate governed by any special Act.
A Company shall not be a small company, if—
(i) It is a Public Company; or
(ii) It is a holding company of any company; or
(iii) It is a subsidiary company of any company; or
(iv) It is a company registered under section 8 (i.e. non-profit company); or
(v) It is a company or a body corporate governed by any special act.
Type # 9. Government Company:
As per section 2(45), a Government company means any company in which not less than fifty one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company. The share held by municipal and other local authorities or public corporations are not taken into consideration.
Government Company Means Any Company:
(a) In which not less than 51% of the paid up share capital is held-
(i) By the Central Government; or
(ii) By any State Government; or
(iii) Jointly by the Central Government and any State Government(s).
(b) Which is a subsidiary of a Government Company?
Type # 10. Dormant Company:
As per section 455(1) of the Companies Act, 2013. Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.
For the purposes of this section, “inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.
Type # 11. Statutory Company:
All those companies, which operate under the special act passed by the State legislature or parliament, are called as statutory companies. These are formed for special purpose by a special act of parliament. Such companies are required to get their accounts audited by Comptroller and Auditor General of India and are publicly accountable to the state legislature or parliament. The examples of such companies are Unit Trust of India, Life Insurance Corporation, Reserve Bank of India, etc.
Types of Companies – 7 Major Types
Type # 1. Private Company:
A private company is one which by its Article of Association:
i. Restricts the right of members to transfer its shares.
ii. Has a minimum of 2 and a maximum of 50 members, excluding the present and past employees.
iii. Does not invite public to subscribe to its share capital.
iv. Must have a minimum paid up capital of Rs. 1 lakh or such higher amount which may be prescribed from time-to-time.
It is necessary for a private company to use the word private limited after its name. If a private company contravenes any of the aforesaid provisions, it ceases to be a private company and loses all the exemptions and privileges to which it is entitled.
A public company means a company which is not a private company. As per the Indian Companies Act, a public company is one which –
i. Has a minimum paid-up capital of Rs. 5 lakhs or a higher amount which may be prescribed from time-to-time.
ii. Has a minimum of 7 members and no limit on maximum members.
iii. Has no restriction on transfer of shares.
iv. Is not prohibited from inviting the public to subscribe to its share capital or public deposits.
A private company which is a subsidiary of a public company is also treated as a public company.
Privileges of Private Company over Public Company:
Privileges of a private limited company over a public limited company are as follows:
1. A private company can be formed by only two members whereas seven members are needed to form a public company.
2. There is no need to issue a prospectus as public is not invited to subscribe to the shares of a private company.
3. Allotment of shares can be done without receiving the minimum subscription.
4. A private company can start business as soon as it receives the certificate of incorporation. It is exempted from receiving the certificate of commencement before it can start a business.
5. A private company needs to have only two directors as against the minimum of three directors in the case of a public company.
6. A private company is not required to keep an index of members while the same is necessary in the case of a public company.
7. There is no restriction on the amount of loans to directors in a private company. Therefore, there is no need to take permission from the government for granting the same, as is required in the case of a public company.
Private Company:
1. Minimum paid-up share capital – Rs. 1 lakh.
2. Number of members – Minimum – 2, maximum – 200.
3. Number of Directors – It must have at least 3 directors.
4. Index of Members – It is compulsory to maintain index of members.
5. Transfer of shares – There is no restriction on transfer of shares.
6. Invitation to public to subscribe to shares – It can invite public to subscribe for its share or debentures.
7. Name – Necessary to use the word ‘private limited’ after its name.
8. Commencement of business – It can commence business only after obtaining both certificate of incorporation and certificate to commence business.
9. Suitability – Medium size manufacturing units, hotels etc. requiring greater capital and managerial requirement than a partnership.
Public Company:
1. Minimum paid-up share capital – Rs. 5 lakh.
2. Number of members – Minimum – 7, maximum no limit.
3. Number of Directors – It must have at least two directors.
4. Index of Members – It is not compulsory.
5. Transfer of shares – There is restriction on transfer of shares.
6. Invitation to public to subscribe to shares – It cannot invite public to subscribe for its shares or debentures.
7. Name – Necessary to use the word ‘public limited’ after its name.
8. Commencement of business – It can commence its business immediately after obtaining certificate of incorporation.
9. Suitability – Airlines, hotels, shopping malls, auto manufacturers, iron and steel industrial units etc., involving heavy financial expenditure, risk and managerial expertise.
Type # 3. One Person Company (OPC):
The Indian Companies Act, 2013 introduces a new type of entity to the existing list, i.e., apart from forming a public or private limited company, the 2013 Act enables the formation of a new entity a ‘one-person company’ (OPC). An OPC means a company with only one person as its members. [Section 3(1) of the Indian Companies Act, 2013]
i. Rule 3(1) provides that only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate OPC.
ii. No person shall be eligible to incorporate more than one OPC or become nominee in more than one such company.
iii. OPC to compulsory convert itself into public or private company in certain cases. Where the paid up share capital of an OPC exceeds Rs. 50 Lakh or its average annual turnover during the relevant period exceeds Rs. 2 crore, it shall cease to entitled to continue as a one person company.
Type # 4. Small Company:
‘Small Company’ means a company, other than public company:
(i) Paid-up share capital of which does not exceed Rs. 50 Lakh or such higher amount as may be prescribed which shall not be more than Rs. 5 crore; or
(ii) Turnover of which as per its last Statement of Profit and Loss does not exceed Rs. 2 crore or such higher amount as may be prescribed which shall not be more than Rs. 20 crore.
[Section 2(85) of the Indian Companies Act, 2013]
Type # 5. Dormant Company:
The Indian Companies Act, 2013 states that a company can be classified as dormant when it is formed and registered under this Act for a future project or to hold on asset or intellectual property and has no significant accounting transaction. Such a company or an inactive one may apply to the Registrar of Companies (ROC) in such manner as may be prescribed for obtaining the status of a dormant company.
[Section 455 of the Indian Companies Act, 2013]
Type # 6. Company Limited by Guarantee:
It means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.
Type # 7. Company Limited by Shares:
It means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.
Types of Companies – On Basis of Ownership: One Person Company, Private and Public Company
On the basis of ownership, a company can be of three types:
1. One Person Company
2. Private Company
3. Public Company
1. One Person Company (OPC):
According to Section 2(62) of the Companies Act, 2013, One Person Company means a company which has only one person as a member.
It is a company incorporated as a private company which has only one member.
As per the draft rules:
(i) Rule 3(1) provides that only a natural person who is an Indian citizen and a resident in India shall be eligible to incorporate OPC.
(ii) No person shall be eligible to incorporate more than one OPC or become nominee in more than one such company.
(iii) OPC to compulsory converts itself into public or private company in certain cases. Where the paid up share capital of an OPC exceeds fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees, it shall cease to be entitled to continue as a One Person Company.
(iv) The words “One Person Company” shall be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved.
2. Private Company:
A Private Company is one which by its Articles of Association:
(i) Restricts the right of its members to transfer shares.
(ii) Except in One Person Company, it has minimum of 2 and a maximum of 200 members excluding past or present employees of the company, who are the members of the company.
(iii) Prohibits any invitation to the general public to subscribe for its shares.
(iv) Must have a minimum paid up capital of Rs. 1 lakh or such higher amount which may be prescribed from time-to-time.
It is necessary for a private company to use the word ‘Private Limited’ after its name as per Section 2(68) of the Companies Act, 2013. If a private company contravenes any of the aforesaid provisions, it ceases to be a private company and loses all the exemptions and privileges to which it is entitled.
A public company means a company, which is not a private company.
According to Indian Company Act, a public company is one which:
(i) Has a minimum paid-up capital of Rs.5 lakhs or a higher amount which may be prescribed from time-to-time.
(ii) Has a minimum of 7 members and no limit on maximum members.
(iii) Has no restriction on transfer of shares.
(iv) Is not prohibited from inviting subscription from general public.
A private company which is a subsidiary of a public company is also treated as a public company.
Privileges of Private Company over Public Company:
A private company is given exemptions or privileges as compared to a public company.
Some of the main privileges are as follows:
1. A private company can be started with just two members, whereas, a public company requires at least seven members.
2. There is no need to issue a prospectus as public is not invited to subscribe to the shares of a private company.
3. It can allot shares without receiving the minimum subscription.
4. A private company can start its work just after getting a certificate of incorporation. It is exempted from getting the certificate of commencement (as required in case of public company).
5. It can work with just two directors as compared to three directors under public company.
6. A private company is not required to keep an index of members, while the same is necessary in case of public company.
7. There is no restriction on amount of loans to directors in a private company. So, no permission is needed from the government for the same as required under public company.
To overcome the difficulties of limited capital, unlimited liability, absence of continuity, etc., in sole proprietorship and partnership, the company form of business came up as a convenient form of organisation.
A Joint Stock Company can be classified on the basis of following features:
1. Mode of incorporation
2. Liability of members
3. Control
4. Ownership
5. Nationality or Jurisdiction
6. Transferability of Shares
Classification of Companies – On the Basis of Mode of Incorporation:
Depending on the mode of incorporation, there are three classes of Joint Stock Companies:
1. Chartered Company:
Companies which are established under a Special Royal Charter or under a special order by the king or queen are called Chartered Companies. Such companies can be formed in any country following the system of monarchy. The East India Company, Bank of England, etc. are examples of chartered companies incorporated in England. Chartered companies, however, do not exist in India.
2. Statutory Company:
A Statutory corporation is established under a special Act of the Parliament or state legislature. The Act lists out details with regard to powers, privileges and area of activities of the corporation. It enjoys autonomous powers regarding expansion and major administrative decisions. However, approval of the government may be required in case of major policy changes.
It works with profit objective, and its activities are mostly commercial in nature. The central government or state government owns such corporations. Examples of such corporations are; The Reserve Bank of India, Life Insurance Corporation, Industrial Development Bank of India, Unit Trust of India, etc.
3. Registered or Incorporated Company:
A company registered under the Indian Companies Act, 1956 is known as Registered or Incorporated Company. This type of business organization is most common in India. Steel Authority of India Limited (SAIL), Reliance Industries Limited (RIL), Maruti Udyog Limited (MUL), etc., are examples of registered companies.
Classification of Companies – On the Basis of Liability of Members:
Registered companies are of three types:
1. Company limited by shares;
2. Company limited by guarantee;
3. Unlimited liability company.
1. Company Limited by Shares:
Such companies are commonly found in India. They are registered with a specific amount of share capital divided into a specified number of shares. The liability of the shareholders is limited to the amount unpaid on shares held by them, if any.
2. Company Limited by Guarantee:
A Company limited by guarantee is defined in the Sub-section (21) of Section 2 of the Companies Act, 2013 as a company having the liability of its members limited to such an amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.
Liability of members is limited to the amount which each member undertakes to contribute:
(a) To the assets of the company in the event of being wound up while he/she is a member or within one year after he/she ceases to be a member, for the payment of the debts and liabilities as may have been contracted before he / she ceases to be a member and
(b) Towards costs, charges and expenses of winding-up and for adjustment of the contributors among themselves.
A guarantee company is formed generally to promote education, art, sports, culture, etc. Trade association, chambers of commerce, stock exchanges, sports clubs, etc., are often established as companies limited by guarantee.
3. Unlimited Liability Company:
As per the Section 2 (92) of the Companies Act (2013), a company can be formed with or without share capital. In an unlimited liability company, the liabilities of its members are unlimited and extend to their personal property. The members of such companies are personally accountable to pay the debts of the company in proportion to their interest.
An unlimited liability company may or may not have a share capital, but the creditors of such a company cannot sue the members straightaway. The liability of the members is enforceable at the time of winding up of the company. Due to these reasons, unlimited liability companies rarely exist in India.
Classification of Companies – On the Basis of Control:
On the Basis of Control, companies can be divided into two categories:
1. Holding Company:
This type of company directly or indirectly, via another company, either holds more than half of the equity share capital of another company, or controls the composition of Board of Directors of another company.
A company can become the holding company of another company in any of the ways given below:
(i) By holding more than 50% of the issued equity capital of the company.
(ii) By holding more than 50% of the voting rights in the company.
(iii) By holding the right to appoint majority of the directors of the company.
For example- Coal India Ltd. is a holding company, and its subsidiaries are Bharat Coking Coal Ltd., Eastern Coalfields, Western Coalfields and Northern Coalfields, etc.
2. Subsidiary Company:
A company, which operates its business under the control of another (holding) company, is known as a subsidiary company. Examples are Tata Capital, a wholly owned subsidiary of Tata Sons Limited.
Classification of Companies – On the Basis of Ownership:
On the Basis of Ownership, companies can be divided into two categories:
1. Government Company:
It is defined under Section 2(45) of the Companies Act, 2013 as “any company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company”.
A Government Company’s annual reports have to be tabled in both the houses of Parliament and state legislature, depending on the nature of ownership. Examples are Mahanagar Telephone Corporation Ltd., (MTCL) National Thermal Power Corporation Ltd., (NTPC), State Trading Corporation Ltd. (STCL), Hydroelectric Power Corporation Ltd. (HPCL), Bharat Heavy Electricals Ltd. (BHEL) and Hindustan Machine Tools Ltd. (HMTL).
2. Non-Government Company:
All other companies, except the Government Companies, are known as Non-Government Companies. They do not possess the features of a government company as stated above.
Classification of Companies – On the Basis of Nationality:
On the basis of nationality or jurisdiction, companies can be classified into three categories:
1. Indian Company:
It is a company formed and registered under the Companies Act, 1956. The registered or principal office of the Indian company, corporation, institution, association or body, in all cases, should be in India, though it may carry on some business activities on foreign shores also. Examples are Patanjali Ayurved Ltd., Dabur India Ltd. and Himalaya Healthcare Ltd.
2. Foreign Company:
A foreign company is basically a company which is not a domestic company, i.e., a company registered outside India in any other foreign country, but conducts business in India via its agents and branches. The foreign companies working actively in India are equally bound by the provisions and mandates of the Companies Act, 1956. Examples are Nestle India Limited, Hindustan Unilever Ltd., Gillette (India) Ltd., etc.
3. Multinational Company:
These types of companies have production and marketing facilities in different nations. Their ownership, control and management are spread in more than one country.
A multinational company uses the following mediums for carrying out its business operations on a global level:
(i) Branches
(ii) Franchisees
(iii) Turnkey projects
(iv) Joint ventures
(v) Subsidiary companies
Coca Cola, Domino’s Pizza, Bata and Nestle are a few examples of prominent multinational companies in India.
Classification of Companies – On the Basis of Transferability of Shares:
On the basis of public interest or transferability of shares, companies are of three types:
1. Private Company:
A private company is an incorporated body, registered under the Companies Act (with a minimum paid-up capital of rupees one lakh), with four important restrictive provisions in its ‘Articles of Association’.
Therefore, a private company is one which:
(i) Restricts the rights of its members to transfer its shares.
(ii) Limits the number of its members to fifty (excluding its employee shareholders).
(iii) Prohibits any invitation to the public to subscribe to any shares or debenture of the company.
(iv) Prohibits any invitation or acceptance to deposits from persons other than its members, directors or their relatives.
A minimum of two persons are required to form a private company.
2. Public Company:
Public company means a company which:
(i) It is not a private company;
(ii) It has a minimum paid-up share capital of rupees five lakh or such higher paid-up capital, as may be prescribed;
(iii) It is a subsidiary of a company which is not a private company. Therefore, a public company does not restrict the transfer of its shares; does not limit the number of its members; can invite the general public to subscribe to its securities; can invite or accept deposits from the public. A minimum of seven persons are needed to form a public company.
Some of the features of a Public Company are as follows:
(i) A Public company can go to public for subscription of its capital either through sale of shares or debentures.
(ii) Shares of a public company are freely transferable.
(iii) It needs certificate of commencement of business in addition to certificate of incorporation from the registrar of companies after fulfilling the requisite formalities.
(iv) It requires minimum seven persons to form a public company and there are no restrictions on maximum number of members.
3. A Private Company Deemed to be a Public Company:
If a Private Limited Company is a subsidiary of a Public Company it will be considered as Deemed Public Company.
All the provisions of a Public Company are applicable on deemed Public Company except following below given restrictions as mentioned in Articles of Association of Company:
(i) Restricts the right to transfer its shares;
(ii) Limits the number of its Members to Two Hundred.
(iii) Prohibits any Invitation to the Public to subscribe for any securities of the company.
Ways in which Private Company can become Public Company:
Firstly by own desire, voluntarily under Section 14 of the Act. Under this method, private company passes general body resolution to convert itself into Public Limited Company. Secondly, by operation of law, Provision of Section 2 (71) contains provision relating to ‘deemed’ public company.
Types of Companies – From the View Point of Incorporation, Liability and Functional Standpoint
Companies may be classified from different points of view, namely:
1. From the point of view of incorporation;
2. From the viewpoint of liability;
3. From a functional standpoint.
Type # 1. As regards incorporation:
There are three ways in which companies may be incorporated, namely –
i. By Charter,
ii. By Statute or
iii. By Registration.
i. Chartered Companies:
A company created by the grant of a charter by the Crown is called a Chartered Company, and is regulated by that Charter. The East India Company and the Chartered Bank of India, Australia and China are examples of this type. Such companies have no place in India since Independence. Even in England charters are rarely granted these days.
ii. Statutory Companies:
These are created by Special Act of Parliament or State legislature. A statutory company is governed by the provisions of the special Act creating it. The Companies Act does not apply to it. Examples are Reserve Bank of India, State Bank of India, Life Insurance Corporation of India, etc.
iii. Registered Companies:
The companies which are incorporated under the Companies Acts by registration with the Registrar of Companies, by far the largest number of companies are incorporated by registration, and all references to companies in this book are to registered companies.
Type # 2. From the Viewpoint of Liability:
Companies which may be registered under the Companies Act are –
i. Companies with unlimited liability,
ii. Companies with liability by guarantee and
iii. Companies with liability limited by shares.
i. Unlimited Companies:
In an unlimited company, the members are liable, each in proportion to the extent of his interest in the company, to contribute the sum necessary to discharge in full the debts and liabilities of the company if it is wound up. The liability is similar to the one under individual proprietorship or partnership. Such companies are now almost non-existent.
ii. Guarantee Companies:
A company limited by guarantee is a registered company having the liability of its members limited by its memorandum to such an amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound up. The members of a guarantee company are, in effect, placed in the position of guarantors of the company’s debts up to the agreed amount. Guarantee companies are also of rare occurrence these days.
iii. Companies Limited by Shares:
A company limited by shares is a registered company having the liability of its members or shareholders limited by its memorandum to the amount, if any, unpaid on the shares respectively held by them. Thus, a member can be called upon to pay only the balance due on the shares held by him. For example, a shareholder, who has paid Rs.75 on a Rs.100 share, can be called upon to pay the balance of Rs.25, and nothing more. Most of the companies formed are of this class.
Type # 3. Functional Division of Companies:
From a functional point of view there are Private or Public Companies. A public or a private company may be a Government company.
i. Private Company:
A private company is a company, which by its articles –
a. Restricts the right to transfer its shares;
b. Limits the number of members to 50, excluding employee members and ex-employee members;
c. Prohibits any invitation to the public for subscription to its shares or debentures.
A private company must always comply with all the three restrictions. If it fails to comply with any of these restrictions it will be treated as a public company. Under Section 43A, a private company which employs public money, though indirectly, to an appreciable extent will be subject to the same restrictions as apply to a public company even if its articles continue to contain the restrictions required under the Act.
Section 43A states that a private company will automatically become a public company as soon as not less than 25 per cent of its paid-up capital is held by one or more bodies corporate. But it will again become private company, if it’s paid up capital held by another body corporate falls below 25 percent.
The minimum number of members to form a private company is two. By definition, a company which is not private is public. The minimum for a public company is seven, but there is no limit to the maximum number.
A private company suits the needs of those who wish to take advantage of limited liability and at the same time keep the business as private as possible. It is in some respects like a partnership. The shares are not freely transferable nor can share warrants be issued. In this way the members of a private company like partners are in a position to maintain personal contact. A private company, therefore, combines the advantage of limited liability and the facilities of the partnership organisation.
Because of the special feature of a private company and many privileges and exemptions enjoyed by it. It is a common practice with businessmen to convert their family businesses into private limited companies, and enjoy the double advantage of retaining privacy are, regards internal affairs and limiting their liabilities. Then, as and when the need arises, they convert the private company into a public company by simply altering the Articles of Association by special resolution.
Advantages that a private company enjoys over a public company:
These advantages may be listed as follows:
a. A private company is simpler to form than a public company. Only two signatories are enough to form it, and it need have only two directors.
b. It can commence business immediately after incorporation; no certificate to commence business, which is compulsory for a public company, is required to be obtained.
c. Since it collects the requisite capital by private arrangement and does not invite the general public to buy its shares by the issue of a prospectus, it may allot shares without following the formalities laid down for a public company.
d. As no ‘outsiders’ are its shareholders, it is not required to hold a statutory meeting or file a statutory report.
e. Unlike a public company, it may pay remuneration to directors and managerial personnel or appoint any one to an office of profit without any restrictions.
f. It may grant loans to directors without obtaining consent or approval of the Central Government.
g. Its balance sheet and profit and loss account are not open to inspection by the public, although three copies of each are required to be filed with the Registrar.
h. The control and management is generally in the hands of the owners of capital which is not the case in a public company.
i. There is greater flexibility in regard to management and conduct of the business than in the case of a public company.
ii. Public Company:
According to the Companies Act, a public company is one which is not a private company.
Since this is a negative definition and does not tell us much, we may define it as follows:
A public company is a company the membership of which is open to the general public under the provisions of its Articles. The minimum number required to form it is seven, but there is no limit to the maximum number. It offers its shares to the public by advertising such offer in a prospectus. A public company does not impose any of the restrictions necessary in the case of a private company, and any person competent to contract can-become its member, no matter whether he is an Indian or a foreigner.
It must allot its shares within 120 days of the issue of the prospectus, but only if the “Minimum Subscription” has been subscribed or applied for. It must have at least three directors and can commence business only after it receives from the Registrar a Certificate to Commence Business.
Private Company becomes Public Company:
Section 43A of the Companies Act provides that a private company becomes public company –
a. Where not less than 25 per cent of its paid up share capital is held by one or more public companies or deemed public companies; or
b. Where the average annual turnover during three preceding years of a private company, having share capital, is Rs.5 crores or more, irrespective of its paid up capital; or
c. Where not less than 25 per cent of the paid up share capital of a public company, having share capital, is held by a private company; or
d. Where a private company accepts, after invitation by advertisement, or renews, deposits from the public, other than members, directors or their relatives.
However, after a private company has become a deemed public company, its articles may include provisions relating to matters specified in section 3(i)(iii) and the number of its members may be less than seven, and it may have only two directors.
iii. Government Company:
A government company is a company, in which not less than 51 per cent of the paid up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments.
Up to 49 per cent of the paid up share capital may therefore be held by private individuals or financial institutions. A Government company may be either private or public company. Most of the government companies in India are private limited companies, and the entire share capital in almost all of them is held by the government.
Types of Companies – Classification Based on Incorporation, Liability, Public Interest, Control, Ownership and Nationality
There are different kinds of Joint Stock companies. These companies are different from one another on account of the way they are classified. In other words, based on the different ways in which companies are classified, we can identify the different kinds of companies.
Thus, let us now look at how companies are classified and the different types of companies on the basis of each type of classification:
1. Classification Based on Incorporation:
Incorporation of a company means bringing the company into existence. A company can be incorporated in three ways.
Thus, on the basis of incorporation, companies can be classified as:
a. Chartered Company:
It is created, or brought into existence, by the ‘charter’ or special sanction granted by the Head of the State. The charter defines the rights, privileges and powers of the company, the geographical area to which such rights will extend and the period of time for which such rights shall continue. The British East India Company is an example of a Chartered company. There are no such chartered companies in India.
b. Statutory Company:
It is a company brought into existence under an Act passed by the legislature of the country or state. The rights, privileges, objects, scope, liabilities etc. are all specifically defined by the provisions of the Act that brings the company into existence. This type of company is a modern version of the ‘Chartered Company’. The Reserve Bank of India, Life Insurance Corporation of India, Unit Trust of India, and State Bank of India are all examples of Statutory Companies.
c. Registered Companies:
It is a company that is registered with the Registrar of companies under provisions of the Companies Act. The formation, working, continuity and closure of such a company is governed by the provisions of the Act. Most of the companies in India are registered companies.
2. Classification Based on Liability:
Liability is the commitment of funds by the contributor of capital to the company. It is the total amount that the contributor of capital has to forego in case the company suffers huge losses and has to be closed down as it is insolvent.
On the basis of liability, companies are classified into:
i. Limited Liability Company:
In such companies, the liability of members is limited.
Such companies can be further classified into:
a. Company Limited by Shares:
A company limited by shares is registered with a specified amount of capital, divided into definite number of shares. The members, or owners, are allotted certain number of shares. Each share has a face-value, usually of Rs.10 or Rs.100. The entire value of the shares may or may not be collected at one time.
The liability of members is restricted to the unpaid value of shares held by the member. Thus, the maximum loss that a shareholder can suffer in case of company limited by shares is equal to the value of shares held by him.
Let us understand this with the help of an example. Let us say a company is started with the aim of buying goods in Delhi and selling them in Hyderabad. The persons who got this idea felt that they can buy goods worth Rs.10,00,000 at one time and sell it in Hyderabad for profit and then keep repeating this activity.
However, they felt that they should start with Rs.5,00,000 and increase the volume slowly to Rs.10,00,000.Thus, although the requirement of funds was Rs.10 lakhs, the immediate requirement was of only Rs.5,00,000.
They decided to raise the money through issue of shares. Accordingly, they decided that each share will have a face value of Rs.10. Since Rs.10 lakhs of capital was needed, it was decided that 100,000 shares will be issued. All of them committed to buying a set number of shares.
For example, Mr. A, a rich businessman who wanted a 10% share in the company, committed to buy 10,000 shares of Rs.10 each. In other words, he committed that he will contribute Rs.100,000 (10,000 shares of Rs.10 each) towards the Share capital of the company.
Similarly, other persons also agreed to buy 90,000 shares of Rs.10 each committing Rs.9,00,000 as their capital. Since the immediate requirement of capital was only Rs.5 lakhs, it was agreed that only Rs.5 per share is required to be paid by each shareholder. Accordingly, Mr. A paid Rs.50,000 towards his commitment.
Similarly, other shareholders paid Rs.4,50,000 towards their commitment. Mr. A is elected as “director” of the company. A is authorized to go to Delhi and purchase the goods. When Mr. A reaches Delhi, he finds that there are lots of attractive items to be bought and that it would make sense to buy more.
Consequently, he takes a loan from one of his friends and buys goods worth Rs.15 lakhs. Mr. A promises his friend that he would return the Rs.15 lakhs in a month’s time as he can call the balance amounts of Rs.5 lakhs and also sell some goods at a profit by that time.
Unfortunately, he suffers an accident while returning to Hyderabad and although he escapes with minor injuries, all the goods are completely destroyed. Mr. A’s friend asks for return of his money. Since all the shareholders know that the company has suffered a loss, they decide to close down the company.
In this case, each shareholder is liable to pay only Rs.5 per share that they had committed and nothing beyond that. Mr. A, who was holding 10,000 shares on which Rs.5 was already paid and only Rs.5 was payable, is liable to pay only Rs.50,000 towards the capital of the company. Similarly, other shareholders will also pay only Rs.5 per share. Thus, the company would be able to collect only Rs.500,000 from its share holders. The balance Rs.500,000 cannot be recovered by Mr. A’s friend. He has to suffer the loss.
Students must note that Mr. A is a very rich man and has money in his bank account. He also owns other assets. However, Mr. A will maintain that his liability as shareholder of the company is limited to the unpaid value of shares held by him, which works out to Rs.50,000. His personal wealth cannot be used to meet the obligations of the company.
Such a company is called a company limited by Shares. It is required to have the words “Limited” as part of its name. This is done so that lenders are aware that the shareholders of the company are not liable for the losses of the company beyond a certain limit and hence, are careful in lending money to such company. Reliance Industries Limited, Infosys Technologies Limited are examples of Companies limited by Shares. These are the most common type of companies.
b. Company Limited by Guarantee:
The liability of members of the company limited by Guarantee is limited to the total amount a member has undertaken to pay if the company has to be closed down. The amount which is committed by all members put together is called ‘Guarantee Money’. Such companies are normally formed with an objective other than maximisation of profits. They are essentially ‘not for profit’ organisations.
A company limited by guarantee can be with or without share capital. If it is with share capital, liability of members is limited to the extent of unpaid amount of shares held by such member plus the amount guaranteed by the number. If it is without share capital, then the liability is limited to amount guaranteed by the member?
ii. Unlimited Company:
It is a company that is registered without the provision that the liability of its members is unlimited, as in the case of the sole proprietor or partnership. The personal property of the member can be claimed in satisfaction of obligations to third parties of the company. Such a company can be converted into a company with limited liability. However, such companies are rare.
In our example, if the company started by Mr. A and his friends were to be an Unlimited company, then the personal assets of Mr. A would have been used to pay the loan taken by him from his friend.
3. Classification Based on Public Interest:
On the basis of ownership, companies are classified into the following:
i. One Peron Company (OPC):
Is defined by the Indian Companies Act 2013 as a company which has only one person as a member. As the definition suggests, there can be only one shareholder in the company. The liability of the OPC is ‘limited’ to the capital and surplus of the company and the director or member of the company is personally not liable for any losses beyond his/her capital contribution.
For practical reasons, the sole member of the company must appoint a nominee, who shall become the sole member of the company in the event of death of the original member. Only a natural person who is an Indian Citizen and resident of India shall be eligible to incorporate a One Person Company or be a nominee in an OPC company.
Salient Features of an OPC:
It is run by an individual or individuals but yet is incorporated as a separate legal entity similar to that of a private or public limited company. It must have only one member at any point of time and may have more than one directors. It must have a nominee director at all points of time.
Advantages of an OPC:
i. A single entrepreneur can manage his business on his own with limited liability.
ii. Since there is a single member in the company, the decision making is usually fast.
iii. Unlike a private limited and public limited company, the compliances of an OPC are relatively simple and easy.
iv. The limited liability feature and the corporate structure would help in procuring loans from banks and other financial institutions
v. Since the liability is limited in an OPC, sole proprietors’ can increase the size of their businesses without any fear of unlimited liability affecting their personal wealth.
Disadvantages of an OPC:
i. The sole member shall not be eligible to incorporate more than one OPC or become nominee in more than one such OPC company.
ii. It is only suitable for small businesses.
iii. The maximum paid up share capital that an OPC can have is Rs.50 Lakhs and the maximum turnover that it can have is Rs.2 Crores. If it crosses either of these thresholds, it has to convert itself into a private limited company
iv. An OPC cannot carry out Non-Banking Financial Investment activities including investment in securities of any body-corporate.
Benefits of OPC in Terms of Compliance:
i. Cash flow statement is not required to be filed with ROC
ii. Annual returns to be signed by a company secretary. Where there is no company secretary, the director can sign the returns.
iii. There is no need to hold an AGMA ‘Minutes’ book has to be maintained and all resolutions and contracts entered upon must be recorded in that book and signed by the member
iv. If there is more than one director in the company, at least one meeting of the Board of Directors must be held once in each half of the calendar year, with a minimum gap of 90 days between both the meetings.
v. Certain sections of the Act, such as Section 100 in respect of Extraordinary General meeting (EGM), Section 100 in respect of Notice of meeting, sections 105 to 108 pertaining to voting shall apply to a One Person Company (OPC).
ii. Private Company:
A private company means a company whose affairs are kept private. In other words, ownership of shares in the company, information pertaining to financial results and management of the company are not open to public.
A ‘Private Company’ is defined under the Companies Act as a company which, by its Articles of Association-
(i) Restricts the right of its members to transfer shares
(ii) Limits the number of members to Two hundred excluding part and present employees of the company who are its members and
(iii) Prohibits any invitation to the public to subscribe for its shares and debentures.
Two persons are sufficient to form a Private Limited Company. It must use the words “private Limited” as part of its name. It has certain privileges and exemptions over a public company.
iii. Public Company:
As per the provisions of Companies Act, a Public Company is a company that is not a private company as defined in the Act. Thus, a public company is one that does not restrict transfer of shares, does not limited the number of its members and does not prohibit raising of funds from the general public.
A minimum of seven persons are required to form a Public Limited Company. There is no maximum limit to number of members. It has to use the word ‘Limited’ at the end of its name. There is no need to use the word ‘Public Limited’. Although a Public company is free to raise capital from the public, it is not under any obligation to do so.
iv. Deemed to be Public Company:
To “deem” means to “consider for all practical purposes”. For example, if an Airline states that all persons above the age of 12 are deemed as adults, what it means is that although people who are aged above 12, say someone aged 15, is NOT an adult by the strict definition of the term, for all practical purposes, the airline would consider such a person as adult.
Thus, a “Deemed to be public” company is a company, which is NOT a public company going strictly by the definition of a public company, but will be treated as a public company. It is a company which is in the nature of a Public Company, but ‘private’ in form as defined in the Companies Act.
A company, which is a subsidiary of a company which is not a private company, shall be deemed to be a public company for the purposes of the provisions of Companies Act 2013, even if such a subsidiary company continues to be a private company in its articles.
4. Classification Based on Control:
‘Control’ means the ability to influence a decision being taken by the controlled person in favour of the person exercising control. For example, if students listen to the teacher and do what she asks them to do, we say that the teacher has good control over the students. A company that controls another company is called Holding Company. The company which is controlled by the holding company is called Subsidiary company.
i. Holding Company:
A company is said to be the Holding company of another company if it controls the other company. A company is said to control another company if- (a) It controls the composition of Board of Directors of the other company (b) It holds majority of shares of the other company or (c) If such other company is a subsidiary of another company, which is the subsidiary of the Holding Company.
ii. Subsidiary Company:
The Company being so controlled by another company is called a ‘Subsidiary Company’. In other words, the decisions taken by the subsidiary company are influenced by what is in the best interests of the holding company.
5. Classification Based on Ownership:
i. Government Company:
As per the provisions of Companies Act, a Government Company is a company in which not less than 51% of the share capital is held by the Central Government or the State Government or together by the Central Government and one or more State Governments. Government companies are also registered under the Companies Act. A company that is a subsidiary of a Government company is also classified as a Government company.
Government companies are formed by the government where it feels that it needs to have strategic control over the company but encourages the private sector to participate by contributing capital and sharing profits. Government companies enjoy certain privileges or concessions that are not available to non-government companies.
ii. Non-Government Company:
A Non-Government company is a company in which the Government does not own a majority stake. These companies are owned and managed by private individuals or private institutions. A company would be considered as a “Non-Government” company even if some shares are owned by the Government, provided the shareholding is less than 51%. In other words, Government does not have a controlling stake in such company.
6. Classification Based on Nationality:
i. Indian Company:
An Indian Company means a Company incorporated in India. It does not matter whether or not the operations of the company are being carried on in India. Similarly, some of the shareholders of the company may not be Indian citizens. Today, most large Indian companies have Foreign Institutional Investors (FIIs) as their shareholders.
ii. Foreign Company:
A Foreign company means a company incorporated anywhere outside India, but having a place of business in India. Such a company operates in India through its agents and offices. Although it is not incorporated in India, the provisions of the Companies Act 2013 are applicable to foreign company also.
Apart from the normal submissions and declarations made by any company, a foreign company is called upon to furnish certain additional information to the Registrar of Companies in India.
iii. Private Company and Public Company:
While we have understood the different-ways in which companies are classified, the most significant classification is on the basis of Public Interest. A private company is one in which the public is not interested. It is essentially a private affair. Therefore, it need not be subjected to the same amount of regulatory scrutiny. As such, a Private company enjoys certain privileges or exemptions.
Exemptions and Privileges of a Private Company:
A Private Company enjoys certain privileges or advantages over a Public Company. Some of these exemptions are applicable only if the private company is not a subsidiary of a Public company. While there are many such exemptions, it is difficult for students to understand these differences without having proper knowledge of Company Law.
Therefore, only a few such exemptions are being listed below:
1. A private company can be started with just 2 shareholders. At least 7 members are required to start a Public Limited company.
2. A public limited company is required to issue a prospectus or file a ‘Statement in Lieu of Prospectus’ with the Registrar of companies, before raising capital and allotting shares to members. A private company is not required to do so.
3. A Public company approaches potential shareholders and seeks their contribution towards the share capital of the company. Some of these potential shareholders may subscribe to its shares and some of them may not. A public company cannot allot the shares to those who have applied unless it receives a stated minimum amount of subscription called “Minimum Subscription”.
For example, if a public company plans to raise 1 crore rupees by way of issue of shares and the minimum prescription is Rs.90 lakhs and the amounts received from various applicants is Rs.85 lakhs, then the public company has to return back the money. However, no such restriction applies to a private company. There is no stipulation of Minimum Subscription. However, this requirement is applicable only to listed public companies.
4. In case of a public company, the remuneration payable to Directors, Managing Director and Managers is restricted to 11% of Net profits of the company. However, there is no such restriction prescribed the law in case of a private company.
5. A private company can operate with just 2 directors. The restrictions applicable to a public company on appointment of Manager of Managing Director are not applicable in case of a private company.
6. There is no restriction on a private company in respect of the kinds of shares to be issued. It can issue shares with disproportionate voting rights.
7. A private company, by definition, restricts the right of shareholders to transfer their shares in the company. Thus, a private company can refuse to allow the transfer of shares by an existing shareholder. Shareholders can however file an appeal before NCLT (National Company Law Tribunal) if share transfers are refused without reasonable cause, subject to certain conditions.
8. There are many statutory requirements on a public company in respect of disclosure of Books of account and other information to the public. Some of these provisions are not applicable to Private companies.
9. The minimum number of persons required for conduct of a meeting is called “Quorum”. The quorum for a meeting in case of a private company is 2 members, unless the “Articles of Association” provide for a higher number. Thus, a private company can hold a meeting with a minimum attendance of 2 members.
10. A private company is given a lot of concessions in respect of requirements pertaining to directors. There is no age limit for retirement of Directors.
Restrictions regarding the number of directorship that could be held by a person are not applicable in case of Directorship of a Private Company. The number of Directors can be increased or decreased without obtaining the consent of Central Government.
11. The restrictions relating to investment of funds by a company in other companies of the same are not applicable in case of a private limited company.
Companies can be classified on various basis.
They are:
i. Chartered Companies – They are incorporated on the basis of a charter issued by the king or sovereign of a country, e.g., East India Company formed under a charter issued by the Queen of England.
ii. Statutory Companies – Such companies are formed under special acts passed in parliament for each company separately, e.g., RBI, LIC, Damodar Valley Corporation.
iii. Registered Companies – These companies are formed by registering them under the Indian Companies Act, 1956.
i. Limited Companies – The liability of members are limited to the extent of face value of shares held by each member of a company.
ii. Guarantee Companies – The liability of each member is extended to the amount of guarantee given by each member.
iii. Unlimited Companies – The memorandum of association will specify that members’ liabilities are unlimited. Such companies are rare now a days.
3. On the Basis of Involvement of Public Money:
i. Private Companies – A private company is prohibited from inviting public to subscribe to the shares or debentures of the company. It cannot also accept deposits from public. Its shares cannot be freely transferred.
ii. Public Companies – A public company can invite the public to subscribe to its shares or debentures. It can also accept deposits from the public. Its shares are freely transferable.
4. On the Basis of Share Holding Pattern:
i. Holding Company – A company holding 51% or more of the paid-up share capital of another company is called a holding company.
ii. Subsidiary Company – A company where 51% or more of its paid-up share capital is held by another company is called a subsidiary company.
i. Government Company – Where 51% or more of the paid-up share capital of a company is held by a Central Government or State Governments or both, it is called a Government company.
ii. One man Company – When almost all the shares are held by a single person except a few shares, then it is called a one man company.