Types of companies in India and their formation under the companies act, 2013

The definition of a company is prescribed under the companies act, 2013.

A company is an entity incorporated under the companies act, 2013 or under any previous company law.

A company is considered a legal entity or a legal person.

Companies have the right to enter into contracts with other parties and sue or sued in the court of law, can possess and transfer properties in the same way as natural persons or incorporated association of persons.

Features of companies act

Separate legal entity

• A company is considered an independent or separate legal entity. It gets considered as an entity separate from its members.
• Even if the members change, the company will continue to exist.
• After incorporation, the company would continue to vest with a corporate personality having a distinct identity to that of the person who composed it.
• If a shareholder holds the entire share capital, the company doesn’t lose its identity even then.
• The existence of a company is irrespective of its motives, intention, schemes or conduct of the shareholders.

Perpetual existence

• A company doesn’t have any physical existence, but it acts through its agents and all such contracts entered into by its agents under the company’s seal.
• A company never dies. It survives till perpetuity, so it is an entity having perpetual succession.
• A company has perpetual existence, and even if the company’s shares get transferred, and shareholders change, or there is a change in members, it will continue to exist.

The common seal of the company

• A common seal symbolises a company as a legal entity. It represents the company’s official signature and gives authorization to any company’s document requiring authorization.
• It also authorises a person to act on behalf of the company. After the 2015 amendment in the company act, it is unnecessary to have a common seal for a company; two directors or one director and one company secretary can authorise.

Limited Liability of members

• A company is the owner of its assets, and no one is liable for the debts taken by it. Members of a company are not its owner, so they are not even responsible for repaying its debts.
• The company members are liable to the extent of the value of shares taken by them in a company limited by shares or the guarantee of the amount in a company limited by guarantee.

Transfer of shares

• The shares, debentures or any other interest of a member in property get considered movable property that can get transferred. This feature of a company provides liquidity to members and stability to the company.
• A member can sell his share in the market to recover his investment amount.

Capacity to sue or be sued

• Because of being a corporate body or entity, a company possesses the capability to sue or get sued in its name.
• A company can get sued for any default arising on its part.
• A company can sue for any acts of other party affecting goodwill of a company causing losses to it.
• A natural person must represent it in a court of law.

Types of business entities in India

Companies are classified based on:-

• Incorporation
• no. of members
• Control
• Liability
• Access to Capital

The companies classified based on incorporation are of two types:-

1. Statutory companies:- Companies incorporated under an act of parliament or state legislature and not under any company law and are outside the purview of the companies act.
2. Registered companies:- These are the companies that get incorporated under section 7 of the companies act.

The companies classified based on control are of three types:-

1. Holding company:- When a company holds the majority of shares in other companies and those other companies are the subsidiary of that parent company, that parent company is called a holding company[Section 2(46)].
2. Subsidiary company:- A company whose management is governed and regulated by a parent company or holding company is called a subsidiary company[Section 2(86)].
3. Associate company:- A company in which another company has significant influence but is not a subsidiary company, then that is called an associate company[Section 2(6)].

Based on access to capital, companies get classified into two categories. These are:-

1. Listed company:- Any company whose securities get listed on any recognised stock exchange for public trading gets termed as a listed company[Section 2(56)].
2. Unlisted company: Any privately owned company whose securities are not listed on any stock exchange are an unlisted company

Based on the number of members, companies get classified into three categories.

1. One person company:- A company that gets incorporated with one person as a member[Section 2(62)]
2. Private company:- A company that is restricted to set its member limit up to a maximum of 200 having minimum paid-up share capital prescribed. No investor can subscribe to its securities[Section 2(68)].
3. Public companies:- A public limited should have a minimum of seven members and can extend up to unlimited members.

   It is not a private company and issues its shares via initial public offerings (IPO) for trading in the open market without any restriction on the transferability of shares.

   A subsidiary company of a public company will also be deemed as a public company, even if the subsidiary company is a private company.

   The company members’ liability gets limited by the value of shares they owned or the amount each member consented to contribute at its winding up.

Based on the Limited liability of members, companies get classified into three categories. These are:-

1. Limited by share:- A company limited by share has the liability of its members restricted to the percentage value of shares owned by them.

   A company having the liability of its members limited by the memorandum of association(MoA) of that company extending up to the amount unpaid on the shares respectively held by them is a company limited by shares.[Section 2(22)]

   Note- A MoA is a document prepared during the incorporation of a company to define its relationship with its shareholders and specifying its objectives.

2. Limited by guarantee:- In this company liability of members are limited to the amount they consented to contribute in the process of winding up a company.

The liability of members is a fixed amount specified in the company’s memorandum under section 4 of the companies act, 2013, decided by them to furnish when a company gets dissolved.

3. Unlimited:- A complete company doesn’t have any limit on the liability of its members[Section 2(92)].

Other types of companies in India

Foreign companies

These businesses mostly get registered outside India. The companies whose shareholding increases to more than 50% in a company established in India.

Such are Indian subsidiaries of a foreign company.

Production companies

A production company is mainly registered with a minimum of ten members and can extend up to unlimited members. It primarily handles the production works in the farming sector with selling and export also.

Similarly, like other companies, the liability of its members is limited to the extent of unpaid share capital by its members.

A producer company is deemed a private limited company, but the number of members does not apply to the same.

Companies incorporated under Section 8 of the companies act

Under section 8 of the Companies Act, the companies get registered and incorporated for charitable purposes and non-profit organisations.

These companies enjoy special status and some exceptions because of their registration under section 8 of the act.

Small companies

The companies get termed as small companies considering their size and paid-up capital and turnover.

The companies are not public companies or do not come under the category of any company mentioned above.

Its paid-up share capital should not be exceeding fifty lakh rupees.

The turnover of these companies should not exceed two crore rupees.

Conclusion

The Companies act, 2013 governs and regulates the incorporation, management and dissolving of a company. It prescribes the provision for different types of companies in India and their categorisation based on its number of members, the liability of members, control, etc.

It laid the exceptions and the provisions for penalties for any company’s act in contravention of the act.

The Companies act brought all types of companies the purview of an act of the legislature, making it easy to protect investors, consumers, members, and shareholders interests. It restricts them from evading money and maintain all their diaries, minutes of meetings, MOA, AOA, etc.

The act lays provisions so the list of all the companies running their work in our country is under the registrar of companies and business entities that are incorporated are safe for collaborations and working.