Types Of Companies

Written by KnowYourGST Team under GST

The growth of the economy and increase in the complexity of business operation in the corporate world has led to the emergence of different forms of corporate organizations. To regulate them, the Companies Act, 2013 has broadly classified the companies into various classes.A company may be incorporated as a one-person company, private company or a public company, depending upon the number of members joining it. Again it may either be an unlimited company, or may be limited by shares or by guarantee or by both. On the basis of control, companies can be classified as associate company, holding company and subsidiary company. Some other forms of classification of companies are foreign company, government company, small company, dormant company, nidhi company and company formed for charitable objects.

Types of Companies

Companies may be classified into various classes on the following basis:

On the basis of liability

Company limited by shares:

Section 2(22) of the Companies Act, 2013, defines that when the liability of the members of a company is limited by its memorandum of association to the amount (if any) unpaid on the shares held by them, it is known as a company limited by shares.

It thus implies that for meeting the debts of the company, the shareholder may be called upon to contribute only to the extent of the amount, which remains unpaid on his shareholdings. His separate property cannot be encompassed to meet the company’s debt.

It may be worthwhile to know that though a shareholder is a co-owner of the company, he is not a co- owner of the company’s assets. The ownership of the assets remains with the company, because of its nature - as a legal person. The extent of the rights and duties of a shareholder as co-owner is measured by his shareholdings.

Company limited by guarantee:

Section 2(21) of the Companies Act, 2013 defines it as the company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up.

Thus, the liability of the member of a guarantee company is limited upto a stipulated sum mentioned in the memorandum. Members cannot be called upon to contribute beyond that stipulated sum.

The common features between a ‘guarantee company’ and ‘the company having share capital’ are legal personality and limited liability. In the latter case, the member’s liability is limited by the amount remaining unpaid on the share, which each member holds. Both of them have to state in their memorandum that the members’ liability is limited.

However, the point of distinction between these two types of companies is that in the former case the members may be called upon to discharge their liability only after commencement of the winding up and only subject to certain conditions; but in the latter case, they may be called upon to do so at any time, either during the company’s life-time or during its winding up.

It is clear from the definition of the guarantee company that it does not raise its initial working funds from its members. Therefore, such a company may be useful only where no working funds are needed or where these funds can be held from other sources like endowment, fees, charges, donations, etc

In Narendra Kumar Agarwal vs. Saroj Maloo, the Supreme court has laid down that the right of a guarantee company to refuse to accept the transfer by a member of his interest in the company is on a different footing than that of a company limited by shares. The membership of a guarantee company may carry privileges much different from those of ordinary shareholders.

Unlimited company:

Section 2(92) of the Companies Act, 2013 defines unlimited company as a company not having any limit on the liability of its members. In such a company, the liability of a member ceases when he ceases to be a member.
The liability of each member extends to the whole amount of the company’s debts and liabilities but he will be entitled to claim contribution from other members. In case the company has share capital, the articles of association must state the amount of share capital and the amount of each share. So long as the company is a going concern the liability on the shares is the only liability which can be enforced by the company. The creditors can institute proceedings for winding up of the company for their claims. The official liquidator may call the members for their contribution towards the liabilities and debts of the company, which can be unlimited.

Unlimited Company is one in which:

  1. There is no limit on liability of the members.
  2. Liability ceases when he ceases to be member.
  3. Liability is not unlimited till the time Company is not wound up.
  4. Members can be called to contribute only in the event of winding up of company.
  5. Liability of each member extends to amount of Company's debts and liabilities.
  6. However he can claim contribution from other members.

On the basis of members:

 

One person company:

The Companies Act, 2013 introduced a new class of companies which can be incorporated by a single person. Section 2(62) of the Companies Act, 2013 defines one person company (OPC) as a company which has only one person as a member.

One person company has been introduced to encourage entrepreneurship and corporatization of business. OPC differs from sole proprietary concern in an aspect that OPC is a separate legal entity with a limited liability of the member whereas in the case of sole proprietary, the liability of owner is not restricted and it extends to the owner’s entire assets constituting of official and personal.

The procedural requirements of an OPC are simplified through exemptions provided under the Act in comparison to the other forms of companies.

According to section 3(1)(c) of the Companies Act, 2013, OPC is a private limited company with the minimum paid up share capital as may be prescribed and has at least one member.

Features of One Person Company:

  1. It has only one person as member.
  2. Minimum capital required is NIL.
  3. The memorandum of OPC shall indicate the name of the other person, who shall, in the event of the subscriber’s death or his incapacity to contract, become the member of the company.
  4. The other person whose name is given in the memorandum shall give his prior written consent in prescribed form and the same shall be filed with Registrar of companies at the time of incorporation.
  5. Such other person may be given the right to withdraw his consent.
  6. The member of OPC may at any time change the name of such other person by giving notice to the company and the company shall intimate the same to the Registrar.
  7. Any such change in the name of the person shall not be deemed to be an alteration of the memorandum.
  8. Only a natural person who is an Indian citizen and resident in India (person who has stayed in India for a period of not less than 182 days during the immediately preceding one calendar year)-
    1. shall be eligible to incorporate a OPC;
    2. shall be a nominee for the sole member of a OPC.
  9. No person shall be eligible to incorporate more than one OPC or become nominee in more than one such company.
  10. No minor shall become member or nominee of the OPC or can hold share with beneficial interest.
  11. Such Company cannot be incorporated or converted into a company under section 8 of the Act. Though it may be converted to private or public companies in certain cases.
  12. Such Company cannot carry out Non-Banking Financial Investment activities including investment in securities of any body corporate.
  13. OPC cannot convert voluntarily into any kind of company unless two years have expired from the date of incorporation, except where the paid up share capital is increased beyond  fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.
  14. If One Person Company or any officer of such company contravenes the provisions, they shall be punishable with fine which may extend to ten thousand rupees and with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.
  15. Here the member can be sole member and director.

Private Company [Section 2(68)]:

“Private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,-

  • restricts the right to transfer its shares;
  • 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:
  • Provided further that-
    • persons who are in the employment of the company; and
    • 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, shall not be included in the number of members; and
  • prohibits any invitation to the public to subscribe for any securities of the company;

Features of Private Company:

  1. Minimum capital required is NIL.
  2. Minimum number of members should be 2, except in case of One Person Company.
  3. Maximum number of members – 200, excluding present employee-cum-members and erstwhile
    employee-cum-members.
  4. Right to transfer shares restricted.
  5. Prohibition on invitation to subscribe to securities of the company.
  6. Small company is a private company.
  7. OPC can be formed only as a private company.

Small Company:

Small company given under the section 2(85) of the Companies Act, 2013 which means a company, other than a public company-

  1. 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; and
  2. 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.

This section shall not apply to:

  • a holding company or a subsidiary company;
  • a company registered under section 8; or
  • a company or body corporate governed by any special Act.

Public company [Section 2(71)]:

“Public company” means a company which -

  1. is not a private company;
  2. has a minimum paid-up share capital, as may be prescribed:

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 ;

Features of Public Company:

  1. Is not a private company (Articles do not have the restricting clauses).
  2. Shares are freely transferable
  3. Minimum paid up capital required is NIL
  4. Minimum number of members - 7
  5. Maximum number of members - No limit
  6. Subsidiary of a public company is deemed to be a public company.

On the basis of control:

Holding and subsidiary companies:

‘Holding and subsidiary’ companies are relative terms.

A company is a holding company in relation to one or more other companies, means a company of which such companies are subsidiary companies. [Section 2(46)].

Whereas section 2(87) defines “subsidiary company” in relation to any other company (that is to say the holding company), means a company in which the holding company-

  1. controls the composition of the Board of Directors; or
  2. 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;

For the purposes of this section -

  • 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;
  • 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;
  • the expression “company” includes anybody corporate;

Example 1:  A will be subsidiary of B, if B controls the composition of the Board of Directors of A, i.e., if B can, without the consent or approval of any other person, appoint or remove a majority of directors of A.

Example 2: A will be subsidiary of B, if B holds more than 50% of the share capital of A.

Example 3: B is a subsidiary of A and C is a subsidiary of B. In such a case, C will be the subsidiary of A. In the like manner, if D is a subsidiary of C, D will be subsidiary of B as well as of A and so on.

Status of private company, which is subsidiary to public company: In view of Section 2(71) of the Companies Act, 2013 a Private company, which is subsidiary of a public company shall be deemed to be public company for the purpose of this Act, even where such subsidiary company continues to be a private company in its articles.

Associate company [Section 2(6)]:

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.

The term “significant influence” means control of at least 20% of total share capital, or of business decisions under an agreement. [Section 2(6)]

The term “Total Share Capital”, means the aggregate of the -

  • Paid-up equity share capital; and
  • Convertible preference share capital.

Vide General Circular no. 24/2014 dated 25th of June 2014, the Ministry of Corporate Affairs has clarified that the shares held by a company in another company in a ‘fiduciary capacity’ shall not be counted for the purpose of determining the relationship of ‘associate company’ under section 2(6) of the Companies Act, 2013.

On the basis of access to capital:

Listed company:

As per the definition given in the section 2(52) of the Companies Act, 2013, it is a company which has any of its securities listed on any recognised stock exchange.

Whereas the word securities as per the section 2(81) of the Companies Act, 2013 has been assigned the same meaning as dened in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.

Unlisted company:

means company other than listed company.

Other companies:

Government company [Section 2(45)]:

Government Company means any company in which not less than 51% of the paid-up share capital is held by-

  1. the Central Government, or
  2. by any State Government or Governments, or
  3. partly by the Central Government and partly by one or more State Governments, and the section includes a company which is a subsidiary company of such a Government company

Foreign Company [Section 2(42)]:

It means any company or body corporate incorporated outside India which -

  1. has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
  2. conducts any business activity in India in any other manner

Formation of companies with charitable objects etc. (Section 8 company):

Section 8 of the Companies Act, 2013 deals with the formation of companies which are formed to promote the charitable objects of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment etc.

Such company intends to apply its profit in -

  • promoting its objects and
  • prohibiting the payment of any dividend to its members.

Examples of section 8 companies are FICCI, ASSOCHAM, National Sports Club of India, CII etc.

Power of Central government to issue the license–

  1. Section 8 allows the Central Government to register such person or association of persons as a company with limited liability without the addition of words ‘Limited’ or ‘Private limited’ to its name, by issuing licence on such conditions as it deems fit.
  2. The registrar shall on application register such person or association of persons as a company under this section.
  3. On registration the company shall enjoy same privileges and obligations as of a limited company.

Revocation of license: The Central Government may by order revoke the licence of the company where the company contravenes any of the requirements or the conditions of this sections subject to which a licence is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of the company or prejudicial to public interest, and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in the register. But before such revocation, the Central Government must give it a written notice of its intention to revoke the licence and opportunity to be heard in the matter.

Order of the Central Government: Where a licence is revoked, the Central Government may, in the public interest order that the company registered under this section should be amalgamated with another company registered under this section having similar objects, to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order, or the company be wound up.

Penalty/punishment in contravention: If a company makes any default in complying with any of the requirements laid down in this section, the company shall, be punishable with fine varying from ten lakh rupees to one crore rupees and the directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine varying from twenty five thousand rupees to twenty-five lakh rupees, or with both and where it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447 which deals with Fraud.

Section 8 Company- Significant points

  1. Formed for the promotion of commerce, art, science, religion, charity, protection environment, sports, etc.
  2. Requirement of minimum share capital does not apply.
  3. Uses its profits for the promotion of the objective for which formed.
  4. Does not declare dividend to members.
  5. Operates under a special licence from Central Government.
  6. Need not use the word Ltd./ Pvt. Ltd. in its name and adopt a more suitable name such as club, chambers of commerce etc.
  7. Licence revoked if conditions contravened.
  8. On revocation, Central Government may direct it to-
    1. Converts its status and change its name
    2. Wind-up
    3. Amalgamate with another company having similar object.
  9. Can call its general meeting by giving a clear 14 days notice instead of 21 days.
  10. Requirement of minimum number of directors, independent directors etc. does not apply.
  11. Need not constitute Nomination and Remuneration Committee and Shareholders Relationship Committee.
  12. A partnership firm can be a member of Section 8 company.

Dormant company (Section 455):

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.

“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.

“Significant accounting transaction” means any transaction other than-

  • payment of fees by a company to the Registrar;
  • payments made by it to fulfil the requirements of this Act or any other law;
  • allotment of shares to fulfil the requirements of this Act; and
  • payments for maintenance of its office and records.

Nidhi Companies:

Company which has been incorporated as a nidhi with the object of cultivating the habit of thrift (cost cutting) and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit and which complies with such rules as are prescribed by the Central Government for regulation of such class of companies. [Section 406 of the Companies Act, 2013]

Public Financial Institutions (PFI):

By virtue of Section 2(72) of the Companies Act, 2013, the following institutions are to be regarded as public financial institutions:

  1. the Life Insurance Corporation of India, established under the Life Insurance Corporation Act, 1956;
  2. the Infrastructure Development Finance Company Limited;
  3. specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;
  4. institutions notified by the Central Government under section 4A(2) of the Companies Act, 1956 so repealed under section 465 of this Act;
  5. such other institution as may be notified by the Central Government in consultation with the Reserve Bank of India:

Conditions for an institution to be notified as PFI: No institution shall be so notified unless-

  1. it has been established or constituted by or under any Central or State Act; or
  2. not less than fifty-one per cent of the paid-up share capital is held or controlled 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.
Author
Posted by CA Ankit Sharma under Company-Law

I am CA, you can contact me for resolving all your tax queries. Reach me at ankitsharma1141@gmail.comContact

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