Types Of Companies Under The Companies Act: An Analysis

INTRODUCTION

There are many forms of business such as, when a business is carried on by a single person, it is called a Sole Trading Concern; when a business is carried on by two or more persons, subject to a maximum of ten in case of banking business and twenty in case of non-banking business, it is called a partnership firm. If the business is to be carried out on a large scale, the alternative resort is the incorporation of a company. A Company may be a private company or a public company. Earlier, the law relating to companies was governed by the Indian Companies Act, of 1956. It has now been replaced by the Companies Act,2013 (Act 18 of 2013) which comprehensively governs this area of regulation.

A Company has no technical or legal meaning. It literally means a group or association of persons, who have agreed to undertake a predetermined venture. Etymologically speaking, the word ‘Company’ is derived from the Latin word ‘com’ and ‘panies’. ‘Com’ means with or together, and ‘panies’ means bread. The words referred to an association of persons, who took their meals together.[1] In Smith v. Anederson, a company in a broad sense may mean ‘an association of individuals formed for some’. Section 2(20) of the Companies Act,2013 implies that ‘Company’ means a company formed and registered under this Act or an existing company. An existing company means a company formed and registered under any of the previous company laws.

Commonly a company may be defined as “an incorporated association which is an artificial person, having a separate legal entity, with a perpetual succession, a common seal (if any), and a common capital compromised of transferable shares and limited liability”[2]. In this article, Team YLCC brings you a guide to the types of companies under Indian law.

TYPES OF COMPANIES:

Companies are classified into different categories as follows:

ON THE BASIS OF INCORPORATION

1. UNINCORPORATED COMPANY- This type of company is also known as ‘Common Law Companies’. They are constituted by contract. An unincorporated Company has no legal personality distinct from its members. The liability of its members is unlimited. Such companies can no longer be formed under the Companies Act, 1956.
2. INCORPORATED COMPANY– An incorporated company is one which is formed for the purpose of carrying business to earn profit. These companies are incorporated either by the Companies Act, 2013 or some other Companies Acts before 2013 (i.e. before the passing of the Companies Act,2013 viz. the Companies Act, 1956 and earlier). They are divided under three categories namely:
3. CHARTERED COMPANY– A chartered company is one, which is created/ established under the Royal Chartered issued by the Crown (the hereditary monark, the King or Queen in England). The best example for the chartered Company is the East India Company, which was established in 1600 A.D. under the charter of 1600 issued by the then Queen Elizabeth.[3] A chartered company enjoys an unrestricted corporate capacity. It can do any such act even if the charter expressly forbids to do such act. At present, there are nonsuch companies in India.
4. STATUTORY COMPANY– A statutory company is one, which is incorporated by a special act of the legislature. They relate to public utility services namely railways, electricity etc. The best example of statutory companies are, The Reserve Bank of India, The State Bank of India, The Life Insurance Corporation of India etc. The object, powers, privileges, obligations etc. of these statutory companies are defined by the respective Act under which they are established. For instance, the Reserve Bank of India was established under the Reserve Bank of India Act, 1935. They are not required to have any Memorandum of Association or Articles of Association. A statutory company enjoys legal/ corporate personality distinct to its members.
5. REGISTERED COMPANY– A registered company is one, which is registered/ incorporated with the Registrar of the Joint Stock Companies under the Companies Act, 2013 or earlier viz. the Companies Act 1956 or any of the erstwhile Company law statutes. Most of the Companies in India are registered companies i.e. registered/incorporated with the Registrar of the Joint Companies under the Companies Act,2013 or any such preceding statute.

ON THE BASIS OF LIABILITY:

On the basis of liability, the registered companies are categorised as follows-

• UNLIMITED COMPANY {SECTION 2(92)}- According to section 2(92) of the Companies Act, 2013 ‘unlimited company’ means a company not having any limit on the liability of its members.

Section 3(2)(c) of the companies Act 2013 permits unlimited liability by the members(shareholders). The liability of members extends to their private property as in the case of sole trader or partnership firm. If assets of the company are insufficient to pay off the liabilities in full, members will be required to pay an unlimited amount to meet the deficiency. However, the creditors cannot proceed (sue) against the personal assets of the shareholders. Such unlimited companies are rarely to be found these days.

• LIMITED COMPANY- Limited company is a joint-stock company the liability of the members of which for the debts of the company is limited by statute. They are of two types:
• COMPANY LIMITED BY SHARES{SECTION2(22)}- A company limited by shares has a share capital, and the liability of each member is limited to the value, his liability remains to the extent of the unpaid amount. If shares are fully paid, the liability of the member in respect of such shares is no more there. Even if a company runs into huge losses a shareholder cannot be called upon to pay more than the value of the shares agreed to be taken by him. In simple words, the members/ shareholders are liable for the face value of the shares only since their liability is limited. Most of the companies operating today belong to this type. A company limited by shares may be a Public Company or a Private Company.
• COMPANY LIMITED BY GUARANTEE{SECTION2(21)}- The members may undertake liability beyond the face value to meet the liability at the time of winding up of the company. It is contained in the Memorandum of Association of the Company.
• ON THE BASIS OF CONTROL:

On the basis of control, the company can be classified into two heads namely-

HOLDING COMPANY {SECTION 2(46)}- According to Section 2(46) of the Companies Act, 2013, ‘holding company, in relation to one or more other companies, means a company of which such companies are subsidiary companies.

A holding company is a corporation organized to hold the stock of another or another corporation. When a company has control over another company, it is known as a ‘holding company. Under any of the three following circumstances, a company should be called a holding company of the other company, if

1. It controls the composition of the Board of Directors.
2. It is controlling the affairs of a company which is also controlling the affairs of some other companies.
3. Its preference shareholders have the same voting rights as given to equity shareholders and they control more than half the total voting power of another company.

SUBSIDIARY COMPANY SECTION 2(87)- According to Section 2(87) of the Companies Act, 2013 “subsidiary Company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company;

1. Controls the composition of the Board of Directors; or
2. Exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

ON THE BASIS OF OWNERSHIP:

On the basis of ownership, companies may be divided into two heads namely-

• GOVERNMENT COMPANY {SECTION 2(45)}- According to Section 2(45) of the Companies Act, 2013, “Government Company” means any company in which not less than fifty-one percent. Of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government Company;

Hindustan Machine Tools Limited (HMT), State Trading Corporation of India Limited (STCIL) are examples of Government Companies.

• NON-GOVERNMENT COMPANY: Non-Government Company means a company that is not a Government Company. It is controlled and operated by Private Capital. All the provisions of the Companies Act, 1956 are applicable to a non-government Company.

OTHER KINDS OF COMPANIES:

In addition to the above, the other kinds of companies are-

• PRIVATE COMPANY: According to section 2(68) of Companies Act,2013 “Private Company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles:

1. restricts the right to transfer its shares;
2. except in case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

1. persons who are in the employment of the company; and
2. persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

1. prohibits any invitation to the public to subscribe for any securities of the company

PUBLIC COMPANY: According to section 2(71) of the Companies Act,2013- “public company” means a company which:

1. is not a private company; and
2. has a minimum paid-up share capital as may be prescribed:

provided that a company that is a subsidiary of a company, not being a private company, shall be deemed to be a public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.

• BANKING COMPANY: According to Section 2(9) of the Companies Act, 2013 ‘banking company’ means a banking company as defined in clause ( c) of section 5 of the Banking Regulation Act, 1949.

A banking company in India has been defined in section 5( c) of the Banking Regulation Act, 1949 as one ‘which transacts the business of banking which means the accepting, for the purposes of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.’[4]

FOREIGN COMPANY: According to Section 2(42) of the Companies Act, 2013, Foreign Company means any company or body corporate incorporated outside India which-

• Has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
• Conducts any business activity in India in any other manner.

Section 379 to 393 of the Companies Act, 2013 deals with Companies incorporated outside India.

ONE PERSON COMPANY: According to section 2(62) of the Companies Act, 2013, ‘one person company’ means a company which has only one person as a member. The Companies Act, 2013 allows ‘one person company’ to get registered as a private company.

CONDITIONS APPLICABLE FOR INCORPORATION OF ONE PERSON COMPANY:

1. Only a natural person who is an Indian citizen and resident in India.
2. No person shall be eligible to incorporate more than a One Person Company or become a nominee in more than one such company.
3. Where a natural person, being a member in One Person Company in accordance with this rule becomes a member in another such company by virtue of his being a nominee in that One Person Company, such person shall meet the eligibility criteria specified in sub-rule (2) within a period of one hundred and eight days.
4. No minor shall become a member or nominee of this kind of company and can hold share with beneficial interest.
5. Such a company cannot be incorporated or converted into a company under section 8 of the Act.
6. Such a company cannot carry out Non- Banking Financial Investment activities including investment in securities of any anybody corporates.
7. No such company can convert voluntarily into any kind of company unless two years have expired from

the date of incorporation of One Person Company, except threshold limit (paid-up capital), is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.

DORMANT COMPANY: According to section 455 where a company is formed and registered under this Act for a further project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Register in such manner as may be prescribed for obtaining the status of a dormant company.

CONCLUSION

The currently prevailing company law provides for detailed and comprehensive regulation of companies and prescribes procedures for administration of such companies by Directors as well as Shareholders. Compared to a sole proprietorship where the owner shares a significant degree of liability, companies provide for protection against such liability and creates a mechanism that is beneficial for the entity’s growth and prosperity.

[1] https://www.takshilalearning.com/introduction-company-under-the-companies-act-2013/

[2] https://taxguru.in/company-law/types-companies-companies-act-2013.html

[3].  https://taxguru.in/company-law/classification-companies.html#:~:text=a)%20Chartered%20Company%3A%20Companies%20that,having%20a%20system%20of%20Kingship.

[4].https://indiankanoon.org/doc/1223029/#:~:text=(b)%20%E2%80%9Cbanking%E2%80%9D%20means,banking%2010%20%5Bin%20India%5D.

YLCC would like to thank Puja Dey for her valuable contribution in this article.