Introduction
Companies are of significant importance in the modern global economy. But, have you wondered what do we mean by the term “company”? What are the various Types of companies in India? What does the word “limited” convey? These questions must necessarily be understood by every commerce, business or a law student in depth.
Understanding Companies under Corporate Law
A Company, as defined under Section 2(20) of the Companies Act, 2013, “is a company incorporated under this Act or any previous company law”. This definition basically highlights the significance of incorporation of the company. To simplify, a company comes into existence once it is incorporated under the relevant legislation.
A Company is a separate legal entity, distinct from its members, as established in the watershed judgement of Salomon vs Salomon & Co. Ltd. This principle signifies that a company is an artificial person which can sue or be sued in its name. Therefore, the creditors of the company can recover their rightful entitlements (dues, debts) from the company itself, and not from their individual members or shareholders.
Corporate Law is the branch of law which encompasses the provisions regarding formation, operation and dissolution of companies. Key areas of corporate law include formation and structure of the company, drafting crucial agreements like NDAs etc., mergers and acquisitions, dispute resolution, rights and liabilities of its shareholders, financing, dissolution or winding up of the company.
It is pertinent to note that there are several Types of companies in India- Public companies, private companies, One Person Company etc. For example, Tata Motors Ltd. is a public company with wider public ownership and stock exchange listing. Flipkart Pvt. Ltd. is a private company as opposed to Tata Motors Ltd.
Understanding various Types of companies in India is crucial in disciplines like law, commerce and business as different Types of companies have different Types of regulatory frameworks, liabilities, capital raising abilities etc. It provides such students and professionals a crystal-clear picture with regard to questions of legal obligations, privileges, analyzing ownership and management structures better.
Classification of Companies under Corporate Law
Companies are classified under following heads for better understanding. There are various Types of companies like companies limited by shares, by guarantee, a private limited or a public limited company, dormant company etc. This article explores these Types in depth while providing simple and core understanding on the Types of companies in India.Types of Companies under the Companies Act, 2013
Companies in India can be classified based on several criterion. Hence, the Companies Act, 2013 provides a comprehensive and a flexible framework that accommodates various business needs and organizational framework. These Types are discussed as below:
Classification based on Liability of Members
There are three Types of company distinguished on the extent of liability of the members in the company. These are listed as follows:
1) Company Limited by Shares (Section 22):
A Company is limited by shares when the liability of the shareholders is limited to the unpaid amount on the shares they hold i.e. to the extent of his unpaid share. This means, in case of any financial distress, insolvency, dissolution etc. a shareholder is under monetary obligation to pay to the extent of the amount that is pending to be paid on his shares. In case of no unpaid share, the shareholder will not be financially liable. Thus, where shares are fully paid by the shareholder, he bears no financial liability. In no instance will his personal assets be endangered or affected.
For example: A shareholder owns 100 shares of Rs. 100 each, where he has paid only Rs. 80 per share, then he will be liable to pay 20 x 100 i.e., 2000 (i.e. Rs. 20 for 100 shares) in event of liquidation of the company.
2) Company Limited by Guarantee (Section 2(21)):
These companies usually don’t have shares and are formed for non- profit or charitable purposes like promoting art, education, science, commerce or social welfare. Basically, these are non-profitable companies with no share capital Therefore, a shareholder “guarantees” a specific amount to be paid when the company winds up. A shareholder woes no further responsibility beyond this agreeable amount in the event of dissolution of the company.
For example: An education trust registered as a company limited by guarantee where each member guarantees to contribute Rs 10,000 in case of winding up of the company.
3) Unlimited Company (Section 2(92)):
As the title suggests, Unlimited companies do not any have limitation on the extent of the liabilities of the members of the company. These companies may or may not have share capital. While unlimited companies enjoy greater flexibility and is not bound by capital maintenance requirements, the personal assets of the members of the companies are exposed to risk in case of insolvency or winding up of the company.
Classification Based on Membership
1) Private Company (Section 2(68)):
A Private Company is defined under section 2(68) of the Companies Act, 2013 as a company which the restricts the right to transfer its shares. Private companies are prohibited from inviting share subscription of any securities of the company.
Members of a private company must not exceed the limit of 200 (excluding former and present employees who are members). A Private Company must end its name with the suffix of “Private Limited/ Pvt. Ltd.” For example, Razorpay Software Pvt. Ltd.
2) Public Company Limited (Section 2(71)):
A Public Company limited must have a minimum share capital as prescribed by law. Public Companies invites for share purchase/ subscription of shares or debentures amongst the public.
There must be at least 7 members to form a public company. Famous Public companies include SBI, Tata Motors Ltd. etc.
3) One Person Company (Section 2(62)):
One shareholder is also the director of the One Person Company. OPC does not require holding minimum share capital. This is the most suitable type for small companies seeking to limit liability.
An OPC can either be limited by shares or by guarantee. OPC is a good option for entrepreneurs who wish to enjoy the perks of corporate structure with limited liability; however, it has certain restrictions like:
a) It cannot convert itself to public or private company unless the financial
thresholds are met.
However, If the paid‑up share capital surpasses ₹50 lakhs or the average annual turnover for the last three consecutive financial years is more than ₹2 crore, the OPC must convert itself into a private or public company (as per the rules) within the prescribed period.
b) It cannot carry out operations as Non-Banking Financial Investment (NBFC).
c) It cannot convert itself to Section 8 Companies.
Classification Based on Control and Holding Structure
1) Parent/ Holding Company (Section 2(46)):
It is the company that holds more than 50 % of voting rights in subsidiary companies. It is the parent company that has the controlling power over the subsidiary companies. It has authority to make management decisions, shapes as well as regulates the decisions of the Subsidiary Company. A peculiar feature to note is that a Holding Company can be formulated for the sole purpose of controlling and managing the subsidiary company. Examples of Holding Company include Tata Sons holding Tata Group.
Becoming a Holding Company attaches various benefits to it like tax benefits, effective utilization of resources etc. However, there are certain disadvantages also, for example, neglect of minority interest, manipulation of accounts etc.
2) Subsidiary Companies (Section 2(87)):
It is a company which is not governed on its own but rathe governed by its parent company. Here the Holding company controls the Composition of the Board of Directors of the subsidiary body corporate.
The Amendment Act, 2017further clarified that ” if a company has more than one half of the voting power over the other company, the latter one will be identified as a Subsidiary Company.”
It may exist separately but is under complete surveillance and control of a different company.
For example: Jio Platforms is a subsidiary of the Reliance Industries.
3) Associate Company (Section 2(6)):
Associate Company is not the holding nor is the subsidiary company. It is a company which holds significant shares in the other company ranging from 20 to 50%. But does exercise control over another company as a matter of necessary implication. It may have a significant and a prominent say in the decisions of the company but it does not dictate the decision of the main company.
4) Affiliate Company:
Company having common ownership are affiliate companies. Affiliate companies may be a part of same corporate conglomeration or can merely be a strategic partnership for pure purposes of business.
Classification based on Listing Status and Share Trading
1) Listed Companies (Section 2(52)):
Listed companies are public companies that must follow the guidelines issued by SEBI i.e. Securities Exchange Board of India. Its shares are open to public trade on the stock exchange. Public subscribes to the shares of these companies by through prospectus issued by the respected companies. A company lists its share through Initial Public Offer (IPO) whereas an already listed company can issue Further Public Offer (FPO).
2) Unlisted Companies:
Shares of these companies are not tradeable freely in public since these companies are not listed, neither they are acknowledged with any registered stock exchange. These companies meet their capital requirements by taking funds from their near and dears like family, friends etc. It is imperative to convert themselves in public companies if they wish to list in its securities in the stock exchange. BYJU’s, Zomato before IPO are examples of unlisted companies.
Classification based on Ownership And Control
1) Government Company (Section 2(45)):
A company in which Central or State government holds 51% of shareholding. These are usually the companies offering major services like energy, transportation and telecommunication. Companies like ONGC, GAIL, BHEL are suitable examples of Government Company.
2) Foreign Company (Section 2(42)):
Foreign Companies are incorporated outside the territorial jurisdiction of India but operates in India. For example, Amazon India- it has wide operation in India. It is imperative to note that Foreign Companies have to adhere to the rules and regulations in India. They must comply with RBI and FDI rules etc. They are subjected to FEMA. They must also be registered with the Registrar of Companies.
For e.g. Google India Pvt. Ltd.
3) Non-Profit Companies (Section 8):
Non-Profit Companies are set up under Section 8 of the Companies Act, 2013. These companies are primary company objected to the promotion of arts, commerce, science, religion, charity etc. These companies do not aim at paying dividends to its members and applies its money on its promotion.
These companies are popularly known as “Section 8 Companies”. For example: Teach for India, Akshaya Patra Foundation.
One peculiar feature of Section 8 companies is that it cannot distribute its profits among shareholders as dividend, therefore, they must re invest them for the non- profit purposes only.
Section 8 Companies and Taxation
Section 8 Companies since are non-profitable companies are taxed as a “domestic company”. It can avail certain exemptions under Section 11,12, 80 or 10(23C) of the Income Tax Act if they are registered as a charitable trust/ institution. Donations to these companies qualify for tax deductions as well.
Other Special Types of Companies
1) Small Companies (Section 2(85)):
Section 2(85) of the Companies Act, 2013 defines small companies. Small Companies, as the name suggests, are companies with comparatively smaller annual turnover i.e. 40 crore maximum. A company with a paid-up share capital is below 4 crores as per the Companies Act. These must necessarily be private companies.
Companies Act, 2013 confers several benefits to the small companies for example fewer board meetings i.e. only 2 unlike 4, simplified annual return filing process, lesser penalties etc.
2) Dormant Companies (Section 455):
Dormant means inactive or inoperative. Dormant Companies are statutorily recognized under Section 455 of the Companies Act, 2013. It addresses the situation where companies are formulated for a future project, holding intellectual property rights while there are no significant financial transactions going on. Significant Financial transactions would mean transactions that are not merely basic procedural transactions like payment of fees to Registrar, payment for completing some statutory requirements etc.
It is significant to note that companies are considered dormant companies if they do not file annual returns for two years consecutively. The former one is purposeful while the other one is declared in the event of failure of filing returns for 2 consecutive years.
3) Producer Companies (Section 465):
These are the Companies which are formed by farmers or agriculturists for production, procurement, harvesting, grading, pooling or marketing activities. It is an amalgamation of features of a company and a cooperative society both. Its main objectives include social welfare, pooling of resources, increasing efficiency, financial support system or encouraging cooperation etc. thus, improving their living standards through collective action or management.
Conclusion:
There are several Types of companies in India. These are based on several criterion like classification based on membership- Private companies, Public Companies, OPC; Classification based on liability etc. Understanding these Types are imperative as it helps build a clear understanding of the structure of the company, its functions, it benefits, purposes and taxation requirements also.
ABOUT THE AUTHOR:
Nikita Verma is a final year law student in Punjab University, Patiala with a keen interest in Corporate law, Laws on Intellectual Property Rights, ADR etc. Passionate about exploring, reading and analyzing legal nuances, Nikita Verma is dedicated to understanding and simplifying the legal complexities, making them accessible, comprehensible and practical.
Frequently Asked Questions (FAQs):
1. What are the major Types of companies under the Companies Act, 2013?
Private, Public, One Person, Limited by Guarantee, Unlimited, Government, Foreign, Section 8 Companies.
2. What is the difference between a Private and Public Company?
Public companies can invite the public to invest and are listed; private companies cannot.
3. What is a One Person Company (OPC)?
A company formed by a single individual with limited liability, introduced to promote startups.
4. Can a company change its type later?
Yes, through legal conversion (e.g., private to public) as per the Companies Act and ROC approval.
Other Articles from Author
Understanding the concept of Mens Rea in Indian Criminal Law – All you need to know.
References Link:
1. https://razorpay.com/rize/blogs/Types-of-companies-in-india
2. https://cleartax.in/s/Types-of-company
3. https://ca2013.com/formation-of-companies-with-charitable-objects-etc/
4. https://moirabaricollegeonline.co.in/attendence/classnotes/files/1588865227.pdf