The Companies Act, 2013 defines a company as a company incorporated in India to carry different types of businesses. Companies are formed under Companies Act, 2013. There are many different types of companies in India based on the functionality, and requirements of the promoters. In this article, we will be delving into the basics of establishing companies in India and the different types of companies in India.
The Companies Act, 2013 talks about many types of companies based on different criteria. Following is a list of different types of companies in India based on various parameters-
Based on the number of members
Public Company: Section 2 (71) of the Company Act, defines the public company. It is a joint-stock company. It states that there is no limit for maximum number of members but it should have a minimum of 7 members. The company must have 7 shareholders and 3 directors. These companies require a certificate of incorporation for starting a business. The main motive is to serve the public. The shares of the company are listed on the stock market and they can be traded by the public at large.
One Person Company: This is the newest form of company in India introduced in 2013 itself to encourage entrepreneurs for starting new ventures. One person company or commonly called OPC can have only one member who has to be an individual Indian Resident. Additionally, it only requires two members for incorporation of a private limited company or a limited liability partnership. OPCs are beneficial for small business as it offers limited liability protection and is easy to incorporate with a minimum paid-up share capital of Rs. 1 Lakh.
Private Limited Company: Section 2(68) talks about the private limited company. Companies having a minimum of two members and a maximum of 200 members are termed as private companies. This company is privately owned by a group of people to make profits. This type of company consists of a group of shareholders with limited liability. It can be easily converted to another type of company. The shares cannot be traded publicly in this company. There are three types of a private limited companies in India.
Company limited by shares
Company limited by Guarantee
Based on Liability
Company Limited by Shares: This is the most common type of private limited company. The liability of the members in this company is limited by the memorandum. If the company is limited by share then the capital is divided into shares. The shares of the company are considered the shareholder’s interest in the company. the number of equity shares decides the ownership of the shareholder in the company. The liability of the members is limited up to the unpaid capital on the shares of the members. The assets of the shareholders cannot be called upon for payment if nothing remains to be paid on his shares. This type of company is also called a share company. Section 2(22) talks about companies limited by share. This type of company can be registered either as a private or a public limited company, or even an OPC.
Company Limited by Guarantee: A company limited by guarantee is a company which is having a limited liability of its members as stated in the memorandum in case of liquidation. This type of company can be a private as well as a public limited company. It has been defined in section 2(21) of the Companies Act. The percentage of ownership in this company is based on the amount guaranteed. It is also known as a guarantee company. These types of companies can have share capital also. If they do, then the liability is extended to guarantee as well as unpaid share.
Unlimited Company: According to section 2(92), it is a company which does not have any limit on the liability of its members. In case there is a loss to the company, and the company is unable to pay its creditors, then in such a case, the personal assets of the members are used for clearing off the debts. Hence, the risk factor of an unlimited company is extremely high. In other words, the members and the shareholders have a joint and unlimited obligation to fulfill the insufficiency of assets of the company for settlement of any debt in case of liquidation.
Limited Company: A limited liability company should have a minimum of three directors but there is no maximum limit in the number of members.
Limited Liability Partnership: The Limited Liability Partnership Act 2008 deals with limited liability partnership (LLP). It is a body corporate enjoying the benefits of limited liability with flexibility in management.
Based on Incorporation
Following is the list of companies classified on the basis of incorporation –
Registered Companies: A registered company can start their operation once they receive the certificate of incorporation from the Registrar. It can be dissolved by law and has perpetual succession. The members have limited liability and shares can be transferred easily to any person. But after the transfer, the new member becomes liable for the unpaid amount of share.
Statutory Company: A statutory company is established by a special act passed by the government. They are owned by the state and have the right to enter a contract on its name. but the employees of the company are not government servants. They have the liberty to raise capital and are not bound by the budget and government audits.
Other types of companies
Section 8 Company: Section 8 company is established for the social welfare, protection of environment or for the promotion of arts or science, etc. The main intention behind section 8 company is to use the profits of the company in fulfilling its objective and for this, it prohibits the payment of dividends to the members. This company enjoys a special status being a non-profit organization working for a charitable purpose.
For establishing a section 8 company, a special approval is needed. They should have a minimum of 2 shareholders and 2 directors with at least 1 Indian director. Moreover, this company doesn’t have minimum capital requirement.
Foreign Company: A company owned by foreigners is known as a foreign company. It is registered in India as a foreign company when foreign participation in shareholding is more than 50%. They are incorporated outside India but have business in India.
Producer Company: A producer company deals with the production, export, and selling of items related to farming. If more than 10 members are producers the producer company is registered. A producer company is a private limited company minus the threshold of the number of members.
Small Company: A small company is a company which is not a public company with paid-up share capital not exceeding Rs. 55 Lakh. These small companies should not have a turnover exceeding Rs. 2 crores. A small company cannot be a holding, subsidiary, section 8 company, or a company governed by a special act.
Holding Company: A holding company has controlling power over another company. It is known as the parent company and the company under control is the subsidiary company. Section 2(46) of the Companies Act, defines the rights of the holding company. they can make managerial decisions and also control the board of directors.
Subsidiary Company: A subsidiary company is a company in which some other company has control either partially or wholly. If the voting power are held 100% by a single company, it is known as a wholly-owned subsidiary. The holding company can control more than one-half of the share capital either on its own or with one or more subsidiary companies.
Government Company: A government company has not less than 51% of paid-up share capital held by central, or state, or partly by both. It can also include a subsidiary of a government company.
The auditor of the government company is always appointed by the central government. The central government prepares the annual report which is later laid before both the houses of parliament.
Associate Company: Section 2(6) defines the associate company. An associate company is also called a joint venture company, it is owned partly by the parent company which has a minority or non-controlling stake in the company. The parent company can have control over 20% of the share capital. They can even have the right to make business decisions.
Listed Company: A listed company has listed securities on any recognized stock exchanges.
Dormant Company: Section 455 of the Companies Act, 2013 defines the dormant company as a company not having significant business or operation in India. It is formed for any future project or for holding an asset or an intellectual property and it does not have an accounting transaction. Such a company or inactive company can file an application with the Registrar to get the status of the dormant company. An inactive company is a company which does not carry any business or has not done any significant transaction in two financial years.
Nidhi Company: A Nidhi company is a finance company dealing with borrowing and lending of money between its members. It earns through the interests on the loans and spends mainly on the interests on deposits like FD, and RDs. It has been defined in section 406 of the Companies Act.
How to incorporate a new company in India?
Firstly, select the name of the company and apply to the ROC to ascertain the availability of the name.
After the name is approved, the applicant can apply for company registration by filing the relevant form depending on the type of company within 60 days of name approval.
Submit all the mandatory documents listed on the official website along with fees.
The ROC verifies the documents along with the forms and then the company is incorporated.
The Companies Act, 2013 is drafted to cater to the needs of the upcoming companies and the variety of new sectors in India. It helps categorize companies depending on the liabilities, incorporation, and number of members, and transferability of shares. Furthermore, it segregates different types of companies in India for better functionality. So, individuals, firms, and companies with different objectives and needs don’t find it difficult to start their businesses.
CS Urvashi Jain is an associate member of the Institute of Company Secretaries of India. Her expertise, inter-alia, is in regulatory approvals, licenses, registrations for any organization set up in India. She posse’s good exposure to compliance management system, legal due diligence, drafting and vetting of various legal agreements. She has good command in drafting manuals, blogs, guides, interpretations and providing opinions on the different core areas of companies act, intellectual properties and taxation.
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