Classification of Companies under Companies Act, 2013

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A company is a voluntary association of persons who have come together to conduct business activities and earn a profit. It is an association of persons who have come together for a common purpose or objective. Section 2(20) of the Companies Act, 2013 defines the word “company” as “Company incorporated under this Companies Act, 2013 or under any previous Company Law”. According to Chief Justice Marshall of USA, “A company is a person, artificial, invisible, intangible, and existing only in the contemplation of the law.” [1]There are numerous companies in our economy which are classified and grouped based on common characteristics. This article aims to draw a classification of the companies based on certain factors which are elaborated below.

Classification

Companies may be classified in accordance with:

  1. Classification of Companies on the basis of incorporation
  2. Classification of Companies on the basis of liability of members
  3. Classification of Companies on the basis of Transferability of shares
  4. Classification of Companies on the basis of nationality/Domicile or jurisdiction
  5. Classification of Companies on the basis of ownership and control

Classification of Companies on the basis of Incorporation

  • Chartered Company – These Companies are formed by the Royal Charter or by a special order passed by the King or Queen. For example, The East India Company. The legal existence of such companies depends upon the authorisation given by the Crown and the same is not recognised currently under the Companies Act, 2013. The powers of business are provided in the charter itself. Chartered Companies enjoy wide powers. This type of company no longer exists  in India.
  • Statutory Company –   These types of companies are formed under a special statute passed by the Parliament or State Legislature. The powers of such companies are provided under the Act itself. These types of companies are not required to prepare a memorandum of association. Such types of companies derive their powers from the act constituting them and do not have a Memorandum of Association or Article of Association. The main purpose behind the incorporation of a Statutory Company is to meet social needs and not earn profit. The examples of such companies are the Reserve Bank of India, the Life Insurance Corporation of India, the State Bank of India, etc.
  • Registered Company –  These types of companies get registered under the Companies Act, 2013. Registered Company is defined under Section 2(20) of the Companies Act, 2013. These types of companies can come into existence when they are registered under the Act. When Registered companies are formed the registrar provides a certificate of incorporation.

Classification of Companies on the basis of Liability of the Members

  • Companies limited by shares –  The provision related to this type of company is mentioned in Section 2(22) of the Companies Act, 2013.   Sometimes the shareholders of a company might not pay the full value of their shares. In these types of companies, the liability of members is limited to the extent of the amount not paid by them. But if the shareholder has paid full value of shares then he does not owe any liability to the company.
  • Companies limited by Guarantee – The provision related to this type of company is mentioned in Section 2(21) of the Act. In this type of company, the liability of members is limited to the amount they agreed to contribute to the asset of the company. Such amount is known as Guarantee and the same is also mentioned in MOA. The amount of guarantee of each member is in the nature of reserve capital. This amount cannot be called upon except at the time of dissolution of Company. The liability of members of this type of company is limited to the undertaking given by them.
  • Unlimited Liability Company – The provision related to this type of company is mentioned in Section 2(92) of the Act. The liability of such a company is unlimited and extends to his personal belongings also. The members are personally liable to pay off the debts of the company as per their share.

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Classification of Companies on the basis of Transferability of the Shares

  • Private Company –  The provision related to this type of company is mentioned in sec 3(1)(b) of the said Act. The number of members in private companies are maximum 50. The shares and debentures of private companies are not available to the public at large. It prohibits invitation for any shares or debentures from the general public. They accept the deposits from members of the company only. The private company must use the word “Pvt Ltd” in its name.

Features of Private Company

  1. It restricts the right of transfer of its shares.
  2. This type of company does not invite the general public to purchase its shares or debentures.
  3. Such type of company may commence its operation only after obtaining the certificate of incorporation.
  4. Issuance of Prospectus is not required.
  • Public Company – The provision related to this type of company is mentioned in sec 2(71) of the Act. It requires a minimum of 7 members to form a public company. It sends an invitation for any shares or debentures from the general public. It allows free transferability of shares. The public company must use the word “ Ltd” in its name.

Features of Public Company

  1. It does not restrict the right of transfer of its shares.
  2. This type of company invites the general public to purchase its shares or debentures.
  3. Such type of company may commence its operation only after obtaining the certificate of Commencement of Business..
  4. Issuance of prospectus is required.

Classification on the basis of Nationality or Domicile

  • Foriegn Company – A company which is incorporated outside India but carries business in India through its subsidiaries. The provision related to this type of company is mentioned in Section 2(42). For incorporation, the foriegn company needs to submit documents within 30 days from the establishment of the place to the registrar of companies. Nationality of members of the company is immaterial.
  • Indian Company – Any Company which is registered under the Companies Act, 2013 is known as Indian Company. A company which is incorporated in India and it carries all its business activities In India.

Classification on the basis of Ownership

  • Holding Company – A company is said to be holding company of another company if –

1) a company which holds more than 50% of equity capital of the company.

2) when a company holds more than 50% of devoting rights in the management, a holding company has the right to appoint the majority of the directors

3) The provision related to this type of company is mentioned in Section 2(46) of the Companies Act, 2013. A company is said to be holding company of another company if it has some administrative control like affairs of the company  over another company. Both Holding and subsidiary companies remain separate legal entities, yet the affairs of subsidiary companies are controlled by holding companies.

  • Subsidiary Company – The provision related to this type of company is mentioned in Section 2(87). The subsidiary company is the one in which another company holds more than 51% of the equity share capital or more than 51% of voting rights more than 51%.
  • Government Company – A government company is one in which 51 % or more paid up share capital is held by the central government. They are partly owned by the Central or State Government. The auditors of Government Company are appointed by the government on the advice of the Comptroller and Auditor General of India. A subsidiary of a Government Company is called a Government Company. Examples of Government Companies are- NTPC, BHEL, Mahanagar Telephone Corporation Ltd.
  • Associate Company – The provision related to this type of company is mentioned in sec 2(6) of the Companies Act. These companies are not like subsidiaries but they have major influence on the other companies for eg :- joint venture company. It requires the influencing company to hold 20% of the share capital or the decision making power of  an associate company upon such influencing company .
  • One Person Company -The provision related to this type of company is mentioned in Section 2(62). This type of company is formed by one person who contributes the total share capital. Such person is regarded as the owner of the company The liability of the owner is limited.
  • Dormant Company

This is the newly introduced type of company under the Companies Act, 2013. The provision related to this type of company is mentioned in sec 455(1).[2] Section 455(3) provides that the registrar shall prepare a register of all dormant companies in a prescribed form. These companies are generally incorporated for future endeavours. they do not have major accounting transactions and they do not carry any formal transaction like other registered companies. They generally remain inactive and can make an application to the registrar in the prescribed manner about the states of the company. The registrar issue certificate of the inactive company to the applicant company and the company remains as a dormant company in the books of registrar.

Conclusion

There are various types of companies under the Companies Act, 2013. The companies are classified on various grounds like incorporation, control, capital, liability, ownership, number of members etc. There is no fixed way of classification of Companies.. Each type of company has its own feature and function.There is some prescribed procedure which is required to be fulfilled for formation of any type of company

REFERENCES

[1] Harleen Kaur,Handbook on Company Law 6 (Wolter Kluwer (India) Pvt. Ltd,2019).

[2] The Companies Act, 2013, India, available at : https://ca2013.com/455-dormant-company/ (last visited on Feb 12,2021).

BY VAISHALI | SHARDA UNIVERSITY

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