A detailed guide on the Classification of companies in India
Classification of companies according to Companies Act 2013:
One of the most important decisions before starting a business is to select the appropriate type of company. As the business evolves, this decision needs to be revisited periodically. As and when it seems necessary, a business entity can exercise the options for conversion and re-conversion. The choice between different types of companies depends on several factors, such as the objects of the proposed business, the possible number of shareholders, the amount to be invested, the size of operations, state regulations, legal requirements, tax consequences, the benefits of one form of a business entity over another, etc. In this blog, a brief description is given of all the different types of companies that can be registered in India.
The table below shows the classification of companies in India:
| Classification of companies in India |
|---|
| On the basis of incorporation 1. Statutory companies 2. Registered companies |
| On the basis of liability 1. Unlimited Liability Companies 2. Companies limited by guarantee 3. Companies limited by shares |
| On the basis of the number of members 1. Private Limited Company 2. Public Limited Company 3. One Person Company |
| On the basis of ownership and control 1. Holding companies and Subsidiary companies 2. Associate companies 3. Government companies |
| On the basis of manner of access to capital 1. Listed companies 2. Unlisted companies |
| On the basis of nationality 1. Indian company 2. Foreign Company |
| Other forms of companies 1. Small company 2. Nidhi Company 3. Producer companies 4. Non-profit company – Section 8 Company 5. Limited Liability Partnership (LLP) |
Classification of companies on the basis of incorporation
Companies can be incorporated under the following categories:
- Statutory companies: These companies are constituted by a special Act of Parliament or State Legislature. The provisions of the Companies Act, 2013 are not applicable to them. Some examples of these types of companies include the Reserve Bank of India, Life Insurance Corporation of India, etc.
- Registered companies: The companies that fall under this category are those that are incorporated and registered with the Registrar of Companies (ROC) under the Companies Act, 2013, or any previous company law.
Classification of companies on the basis of liability
A company registered under the Companies Act, 2013 may be a company limited by shares, a company limited by guarantee, or an unlimited company. Thus, all the companies may be further classified on the basis of liability as follows:
- Unlimited Liability Companies: Section 2(92) of the Companies Act, 2013 states that an unlimited company means a company that has no cap on its members’ liability. In this form of company, the members are responsible for the company’s debts in proportion to their respective interests in the company and their liability is unlimited. These companies may or may not have share capital. They may be either a public company or a private company.
- Companies limited by guarantee: These companies are defined under Section 2(21) of the Companies Act, 2013. A company that has the liability of its members restricted to a sum that the members can respectively undertake, by specifying in the Memorandum, to contribute to the company’s assets in the event of it being wound-up, is known as a company limited by guarantee. In effect, the members of a guarantee company are positioned in the capacity of guarantors of the company’s debts up to the agreed sum. These companies may be with or without share capital.
- Companies limited by shares: A company which, by the liability clause in its Memorandum, has the liability of its members limited to the amount (if any) unpaid on the shares respectively owned by them, shall be called a company limited by shares. For example, a shareholder who has paid Rs. 65 on a company’s share of the nominal value of Rs. 100 can be called upon to pay the balance of Rs. 35 only. These companies are defined under Section 2(22) of the Companies Act, 2013.
Companies limited by shares are by far the most prevalent form and they may be either a public company or a private company.
Classification of companies on the basis of the number of members
On the basis of the number of members, the three basic types of companies which can be registered under the Companies Act are:
- Private Limited Company
- Public Limited Company
- One Person Company (to be formed as Private Limited Company)
1. Private companies: 2 or more persons can form a private company under the Companies Act, 2013. The company should be formed for a lawful purpose and under private ownership, i.e., its shares may not be offered to the general public for sale.
A private limited company has the following characteristics:
- The rights of shareholders to transfer shares are restricted.
- The minimum number of members is 2 and the maximum number of members is 200. It is essential to comply with the said statutory threshold at all times.
- A private company is prohibited to invite the public to subscribe to any shares or debentures, or to any form of security.
2. Public companies: Any 7 or more persons can form a public company for any lawful purpose by subscribing their names to Memorandum and by complying with the requirements (pertaining to registration) of the Companies Act.
A public limited company has the following characteristics:
- The rights of shareholders to transfer shares are not restricted.
- The minimum number of members is 7 and the maximum number of members is unlimited.
- A public limited company must have a minimum paid-up share capital of Rs. 5 lacs or such higher amount as may be prescribed.
- A public company is not prohibited to invite the public to subscribe to any shares or debentures, or to any form of security. It may use public offerings (IPO or FPO) to collect public funds.
- By operation of law, a private company which is a subsidiary of a public company is treated as a public company.
3. One Person Company: One Person Company means a company with only one person as a member. Such a member can nominate any person who shall be entitled to become a shareholder in the event of death/ incapacity of the original stakeholder. The written consent of such a person (nominee) should be filed with the Registrar of Companies along with the Memorandum and Articles, at the time of incorporation of OPC.
It can be said that an OPC is a kind of a private limited company where only one member is required to form the company. At any given time during its existence, there is only one member and such member must be an individual and a resident of India.
Classification of companies on the basis of ownership and control
On the basis of control, companies are classified as follows:
- Holding companies and Subsidiary companies: In certain situations, the shares of a corporation may be owned in full or in part by another company. Here, the holding or parent company becomes the company controlling these shares. Similarly, the corporation whose shares are held by the parent company becomes its subsidiary company.
By dictating the composition of their board of directors, holding companies exert control over their subsidiaries. In addition, parent companies also exert power by controlling more than 50 percent of the stock of their subsidiary companies.
In the following scenarios, a company will be called a holding company of another (subsidiary):
- If it controls the composition of the other company’s Board of Directors, or
- If it exercises or controls more than half of the total equity share capital of the other company, either on its own or together with one or more of its subsidiary companies
2. Associate companies: Associate companies are those in which other companies hold a significant influence. This “significant influence” amounts to ownership of at least 20% shares of the associate company. For example, if Company A holds more than 25% shares of Company B, then Company B is an associate company of Company A. Significant influence can also be inferred from any agreement whereby the decision making of the associate company is placed upon any influencing company.
3. Government companies: Government company means any company in which not less than 51% of the paid-up share capital is owned by the Central Government or any State Government(s), or partly by the Central Government and partly by one or more State Governments. A government company also constitutes a company that is a subsidiary of such a government company.
A government company is subject to all provisions of the Companies Act, 2013 unless some exemptions are specifically granted by the Central Government. Government companies may be formed as a private limited company or public limited company.
Classification of companies on the basis of manner of access to capital
Based on the manner of access to capital, companies are classified as follows:
- Listed companies: Listed companies are those that have their shares listed on stock exchanges. This means that individuals can openly purchase their securities. Consequently, it is possible to list only public companies and not private companies.
- Unlisted companies: In contrast, unlisted companies do not list their shares on stock exchanges. Both public and private companies can fall into this category.
Classification of companies on the basis of nationality
- Indian company: A company that is formed and registered in India is known as an Indian company.
- Foreign Company: A foreign company is a company that is incorporated outside India and has an established place of business within India.
Other forms of companies and/or business entities
Besides the above, some other kinds of corporate entities could be:
- Small company: A small company is a new concept introduced under Section 2(85) of the Companies Act, 2013 to provide some relaxations and privileges with lesser compliance burden on the entities that are smaller in size and operations.
A ‘small company’ is defined as a company, other than a public company whose paid-up share capital does not exceed Rs. 50 lacs or such higher prescribed amount which shall not be more than Rs. 10 crores, and whose turnover of the preceding financial year does not exceed Rs. 2 crores or such higher prescribed amount which shall not be more than Rs. 100 crores.
- Nidhi Company: A Nidhi company is one that belongs to the non-banking finance sector and is recognized under Section 406 of the Companies Act, 2013. The core business of a Nidhi company is borrowing and lending money between its members. Such companies are incorporated in the nature of Public Limited Company and, therefore, they need to adhere to two sets of norms, i.e., one of Public Limited Company as per Companies Act, 2013 and another is the Nidhi Rules, 2014.
- Producer companies: A producer company is a corporate entity having the objects or actions referred to in Section 581B and registered under the provisions of the Companies Act as such. The membership of producer companies is open to those persons who are primary producers or farmers and who are engaged in an activity by which some sort of agricultural products is manufactured.
- Non-profit company – Section 8 Company: ‘Section 8 company’ is a company set up for the promotion of commerce, trade, art, science, sports, education, religion, charity, research, social welfare, environmental protection, or any other purpose. Profits, if any, or other revenues of the company are only applied towards the advancement of the objects of the company, and no dividend is paid to its members. Section 8 Companies are registered under the Companies Act, 2013.
- Limited Liability Partnership (LLP): LLP is an alternative business vehicle that offers the advantages of a Limited Liability Company along with the flexibility of a partnership firm. Because LLP includes the elements of both a ‘corporate structure’ and a ‘partnership firm structure’; it is often referred to as a hybrid of a partnership and a company.
LLP is a separate legal entity that, irrespective of changes in its partners, may continue its existence. It is a partnership firm incorporated, formed, and registered under the Limited Liability Partnership Act, 2008, and is collectively observed by the rules made thereunder.
LLP is useful for small and medium-sized enterprises, in general, and for enterprises in the services sector, in particular, because of the flexibility in its structure and operation. LLP is also very appropriate for professionals like company secretaries, chartered accountants, cost accountants, advocates, etc. since it helps them to form multi-disciplinary LLP firms.
Takeaway
This blog is merely an attempt to throw light on the meanings of various terms used to define companies under different categories as per the Companies Act, 2013. It does not mean that a company classified under a specific category cannot have the peculiarities of another category of companies. For example, a government company may be formed either as a private limited company or a public limited company.
Hope the information provided in this blog proves helpful to you!
Also read: All about Cost Audit Applicability under Companies Act 2013
