This article is written by Aaditya Kapoor, a law-aspiring student of Vivekananda Institute of Professional Studies. Through his research, Aaditya strived to shed light on the various types of companies that have been prescribed under the Companies Act, 2013, along with their functioning that has also been laid down within the act.
In a world that swiftly nudges itself further and further towards industrialization, the corporate sector is perhaps the most vital element of what holds together a nation’s economy – and India is no exception. According to the Indian Companies Act, 2013, a company has been defined as an association registered with the Registrar of Companies, in which the association itself is an artificial legal person possessing an independent, legal entity and a common capital containing transferable shares.
A company can be more vividly described as a business entity acting as a legal person, formed by a single or a group of legal persons to felicitate business. It isn’t a requirement of necessity for there to be a group of persons involved in the formation of a company, as it is possible and plausible now for one person to do the same – as long as the aforementioned legal person is recognized by law as someone with certain legal rights and obligations.
To avoid and derail an illegal entity from forming a company, the Companies Act, 2013 has also prescribed the various types of companies that can be formed, with certain guidelines attached to the formation of each. This article shall reflect light on each type of company, by segregating them into four major sub-categories:
- Companies on the basis of Incorporation
- Companies formed on the basis of sharing of liability
- Companies formed on the basis of exercising control
- Companies formed on the basis of number of members(or transferability of shares)
- Other classifications
While each classification is different in itself, there are a few factors that remain constant while scrutinizing the company’s applicability within the Companies Act, 2013.
1. CLASSIFICATION BY MODE OF INCORPORATION
On the basis of incorporation, companies are categorized into:
i) Registered Companies: Such companies only come into existence after they register themselves under the act, followed by the Registrar of Companies passing the Certificate of Incorporation. This process is to formally induct them into registrants within the Companies Act, as per government regulations.
ii) Statutory Companies: The companies in this category are formed by the passing of a special act, by either the Parliament itself, or by Central or State Legislation. A company formed under the aforementioned classification is independent and administers control over a specified are. The reason for its formation is to carry out the business of national importance. An example of this is the Reserve Bank of India that was formed under the RBI Act of 1934.
iii) Royal-Chartered Company – While such classification of companies is scarce within the present scenario, a royal-chartered company is formed by special order of a monarch. A prime example of such a company is the East India Company.
2. CLASSIFICATION BASED ON LIABILITY OF THE MEMBERS
i) Companies Limited by Shares: A company within this category has a defined share capital with its members sharing limited liability to the value of shares subscribed by them. This essentially means that the individual liability of members is limited to the value of shares held by them.
ii) Companies Limited by Guarantee: Such a company is one that has the liability of its members limited by the memorandum to any amount of money that the members may have to pay in return of the assets of the company, in the event of it being wound up. It’s arbitrary for these companies to have or not have a share capital.
iii) Companies with unlimited liability: Such A company which does not have any limit on the liability of its members can be considered as a company with unlimited liability. Therefore, the company is not restricted to the amount of money that members or shareholders have to pay in the event of liquidation.
3. CLASSIFICATION BASED ON CONTROL
i) Holding and Subsidiary Companies: A company shall be deemed to be a holding company of another, if that other company is a subsidiary of the prior company; whereas a company shall be considered as a subsidiary of another company if the other company issues control to its Board of Directors, holds more than half of nominal value of equity share capital and if it holds more than 50% of the total voting rights of the company.
ii) Associate Companies: If a company happens to be influenced by non-subsidiary companies, and has control over the total share capital of at least 20%, it can be classified as an associate company.
4. CLASSIFICATION BASED ON THE NUMBER OF MEMBERS
i) Public Company: A company with its ownership open to the public can be classified as a public company. There are no restrictions to the number of members or to the transferability of shares of a public company. However, in India, a public company is required to have at least 7 members and 3 directors and must issue prospectus with the Registrar of Companies before selling its shares.
ii) Private Company: Contrary to the aforementioned classification of company, a private company cannot be owned by the public and has a restricted number of members; therefore, the right to transfer its shares is also limited.
In India, a Private Company has a legal identity of its own, and possesses a company name, an address, with at least two directors, amongst which one has to be an Indian Resident.
ii) One-person Company: As the name suggests, a company having only one founder/promoter can be categorized as a one-person company.
Such type of company still has all provisions of a legal company and the owner can run the company on his own as long as all legal requirements are fulfilled. The founder has to be a natural person residing within the country that governs provisions related to his company.
5. OTHER CLASSIFICATIONS
i) Non-profit Companies: A company that establishes itself for non-profit, charitable objectives can be classified as a non-profit company. As per section 8 of the Companies Act, these companies are registered as limited companies and intend to use profits or any other income for the benefit of people. The dividend is not paid to any of the members of the company but the company still enjoys all benefits and provisions of a limited company.
ii) Government Company: Such companies are those in which at least 51% of the share capital is held by either the Central or the State government.
iii) Foreign Companies: Any company that has been incorporated outside India, but has established business in India can be categorized as a Foreign Company.
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