Under the Companies Act, 2013, companies are classified based on incorporation, liability, membership, and control. This classification allows businesses to align with specific regulatory and operational needs. Types include statutory companies formed through legislative acts, incorporated companies
Introduction
A company refers to an association of two or more individuals formed with a common objective, often for the economic benefit of its members. Legally, any association of persons pursuing a shared purpose can be registered as a company. Section 3(1) (i) of the Companies Act, 1956 defines a company as “a company formed and registered under this Act or an existing company.” Section 2(20) of the companies act, 2013 further clarifies that “A company means a company incorporated under this Act or under any previous company law.” In essence, a company is a voluntary association recognized by law, characterized by a distinct name and common seal, established to conduct business for profit.
In India during the 17th and 18th centuries, the British East India Company played a significant role in bringing colonization and economic transformation. This evolution of chartered companies, established under a special charter granted by a Monarch, allowed the sovereign to revoke the charter and dissolve the company if it acted beyond the scope of its charter. However, chartered companies no longer exist in India.
Today, in India, there are several types of companies, classified based on criteria such as liability, number of members, control and incorporation. These classifications help determine regulatory requirements, compliance obligations and governance structure for companies operating under this Act.
Types of Companies
Companies can be of various types based on various factors. The different types of Companies are:
1. Based on mode of incorporation
- Statutory companies
- Registered or incorporated companies
2. On the basis of liability
- Companies limited by shares
- Companies limited by guarantee
- Unlimited companies
3. Based on number of members
- Private company
- Public company
- One Person company
4. Based on control
- Holding company
- Subsidiary company
5. Other forms of companies
- Government company
- Non Profit Oriented Company
- Foreign company
- Domestic company
- Dormant company
- Small company
- Associate company
Based on mode of Incorporation
1. Statutory Companies
- These companies are created through a Special Act passed by the Central or State legislature. Examples include the Reserve Bank of India, State Bank of India, Industrial Finance Corporation, Unit Trust of India, State Trading Corporation, and Life Insurance Corporation etc.
- Unlike companies formed under the Companies Act, statutory companies do not have a memorandum or articles of association. Instead, they derive their powers from the constituting Act, and any changes to their powers require legislative amendments.
- The Companies Act applies to these companies unless provisions conflict with the Special Act.[1] These companies are typically established to serve social needs rather than for profit-making.
2. Registered or Incorporated Companies
- Such companies come into existence upon registration under the Companies Act, and a certificate of incorporation is issued by the Registrar of Companies.
On the basis of Liability
1. Companies Limited by Shares
- These companies have share capital, and the liability of each member is limited by the Memorandum to the unpaid portion of the face value of the shares they have subscribed to.
- Section 2(22) defines companies limited by shares.
- This means that members can be called upon to pay the remaining amount on their shares, either during the company’s existence or upon winding up. These companies can be either public or private and are the most common type of companies.
2. Companies Limited by Guarantee
- Section 2(21) of the companies act defines Companies that are limited by Guarantee.
- These companies may or may not have share capital. Each member agrees to pay a fixed sum, specified in the Memorandum, in the event of the company’s liquidation to cover its debts and liabilities.
- This sum is known as a “guarantee.” The liability of each member is limited to the guaranteed amount and, if applicable, the unpaid portion of the shares they have subscribed to.
- Non-profit or non-trading companies, such as those promoting culture, science, religion, or charity, are often formed as companies limited by guarantee.
3. Unlimited Companies
- Section 2(92) defines unlimited companies.
- These companies do not place any limit on the liability of their members. In such companies, members are fully liable for the company’s debts, and this liability is not capped by shares or guarantees.
- An unlimited company may or may not have share capital, and if it does, it can be either a public or private company.
- The Articles of Association specify the share capital and the number of members with which the company is to be registered.
Based on Number of Members
1. Private Company
- As per Section 2(68) a private company is defined by the following characteristics, as stated in its Articles of Association:
- It limits the number of its members to two hundred, excluding employees and ex-employees who are or continue to be members.
- It restricts the transfer of its shares, if applicable.
- It prohibits any public invitation to subscribe for shares or debentures.
- In cases where two or more individuals hold shares jointly, they are considered a single member.
- The minimum number of members required to form a private company is two.
- Additionally, a private company must include the abbreviation “Pvt.” In its name.
2. Public Company
- Section 2(71) defines a public company as one that is not classified as a private company. The key distinctions of a public company are:
- Its Articles of Association do not restrict the transfer of shares.
- It places no limit on the maximum number of members.
- It invites the general public to purchase shares and debentures.
3. One Person Company
- There was no provision for a One Person Company in the Companies Act, 1956. The concept of One Person Company was inserted in the Companies Act, 2013 in Section 2(62).
- A One Person Company (OPC) represents the corporatization of sole proprietorship firms, allowing for incorporation with just one individual as a member.
- In an OPC, the sole promoter retains full authority over the company while limiting their legal and financial liability to the extent of their contributions to the company.
- The promoter is required to appoint a nominee who will assume control of the OPC in the event of the promoter’s death or incapacity.
- Only a natural person who is an Indian citizen, whether residing in India or not, is eligible to incorporate an OPC and appoint a nominee.
- This structure provides the benefits of limited liability while maintaining complete control in the hands of a single individual.
Based on Control
1. Holding Company
- Holding company is defined under Section 2(46) of the Companies Act, 2013.
- A company is classified as a holding company if it has control over another company, known as a subsidiary.
- A company is considered the holding company of another if the latter is its subsidiary. Control can be established in one of the following ways:
- By holding more than fifty percent of the issued equity capital of the subsidiary company.
- By holding more than fifty percent of the voting rights in the subsidiary company.
- By securing the right to appoint the majority of the subsidiary company’s directors, either directly or indirectly.
- Despite being separate legal entities, the affairs of both companies are managed and controlled by the holding company. A holding company can have multiple subsidiaries, and it must disclose detailed information about its subsidiaries in its annual accounts.
2. Subsidiary Company
- Subsidiary companies are defined under Section 2(87) of the Companies Act, 2013.
- A company is considered a subsidiary of another company, referred to as the holding company, when control is exercised by the holding company over it.
- Thus, if Company S is controlled by Company H, then Company S is the subsidiary of Company H.
Other Forms of Companies
1. Government Company
- Government Companies are defined under Section 2(45) of the Companies Act.
- A government company is defined as a company in which at least 51% of the paid-up capital is held by the Central Government, a State Government, or both, either singly or jointly.
- This includes any subsidiary of such a government company. Although a government company may have its share capital wholly or partially owned by the government, it does not become an agent of the government.
- The auditors of a government company are appointed by the government based on the advice of the Comptroller and Auditor General of India. The annual report, along with the auditor’s report, is presented to both Houses of Parliament.
- Examples of government companies include Mahanagar Telephone Corporation Ltd., National Thermal Power Corporation Ltd., State Trading Corporation Ltd., Hydroelectric Power Corporation Ltd., Bharat Heavy Electricals Ltd., and Hindustan Machine Tools Ltd.
2. Non-Profit Oriented Company (Section 8)
- A company registered under this section is a type of non-profit organization that is formed for charitable purposes, such as social welfare, environmental protection, arts, science, commerce and education.
- These companies are eligible for tax exemption under various sections of the Income Tax Act.
- These companies must apply their profits or other incomes for the purpose of promoting their objects.
3. Foreign Company
- It means any company incorporated outside India which has an established place of business in India.
- A company has an established place of business in India if it has a specified place at which it carries on business such as an office, storehouse or other premises with some visible indication premises.
- Section 2(42) contains provisions applicable to foreign companies functioning in India.
4. Domestic Company
- A Domestic Company is a company that is registered and operates within India.
- It is incorporated under the Companies Act, 2013 or any previous law in India.
5. Dormant Company
- According to Section 455 of the Companies Act, 2013, a company includes being registered for a future project or holding assets or intellectual property.
- This company has not carried on any business or operations or made any significant accounting transactions, annual returns for the last two financial years.
6. Small Company
- As per Section 2(85), a small company is defined as a company that does not meet the criteria of a Public Company.
- Section 2(85) read with Rule 2(1) (t) of the Companies (Specification of definition Details) Rules 2014 states that a company, whose paid-up share capital is not more than 4 crores rupees and turnover for the immediately preceding financial year does not exceed more than 40 crores rupees, is registered as a small company.
7. Associate Company (Joint Venture Company)
- An Associate Company is a company in which another company (investor) has “significant influence” but is not a subsidiary company.
- Significant influence refers to when the investor company holds 20 % or more of the voting power in the associate company or controls the business operations of the associate company.
- The definition of an associate company is provided under Section 2(6) of the Companies Act, 2013.
Conclusion
The Companies Act highlights the complexity of corporate structures and their diverse legal and operational implications. Each classification—based on incorporation, membership, control, ownership, or nationality—presents unique frameworks. Chartered companies are obsolete in India, while statutory companies serve specific legislative purposes. Registered companies, including those limited by shares or guarantee, meet varied business needs. One Person Companies (OPCs) cater to solo entrepreneurs, offering limited liability and full control. Public and private companies, as well as holding and subsidiary entities, reflect the complexities of corporate control. Understanding these structures is essential for navigating regulations and aligning business strategies.
[1] The Companies Act, 2013, s. 456(2).