Types of Companies in India

Types of Companies in India

The Companies Act, 1956 defines various types of companies in India. We have often heard and read about various types of companies such as private ltd. company, public ltd. company, unlimited company, sole proprietorship, joint hindu family, partnership, cooperatives, Limited Liability Partnership (LLP), liaison office, branch office, project office, subsidiary company, etc.

However, we need to understand the difference between these companies. Section 3(1) of the Companies Act, 1956 defines two types of companies in India:

• Companies formed and registered under the Companies Act
• Any existing company established under any previous Act

There are various types of companies depending on differences in their core objectives.

Various important classifications of companies, as defined by the Companies Act, 1956 are as follows:

Classification of Companies by Mode of Incorporation

As per the mode of incorporation, there are three categories of companies:

Chartered Companies

Such companies are incorporated under a special charter by a monarch (for example, the Queen of England). For instance, East India Company and Bank of England were incorporated in England. Such companies are regulated by their charter and the Companies Act does not apply on them.

The charter also defines the power and nature of the company. Such a company can enter into any contract it wants. However, in case such a company deviates from its business as stated in the charter, the monarch (Queen of England) can declare the company to be invalid and also close it down. At present, such companies do not exist in India.

Statutory Companies

Such companies are incorporated by a special act passed by the central or state legislature. For example, Reserve Bank of India, State Bank of India, Industrial Finance Corporation, Unit Trust of India, State Trading Corporation and Life Insurance Corporation are statutory companies.

In statutory companies, there are no articles of association or memorandum. Statutory companies derive their powers from the Companies Act and possess certain powers because they have been constituted under the Act.

To make any changes in the powers of such statutory bodies, legislative amendments need to be made. Such companies are non-profit enterprises that are formed to meet social needs.

Registered/Incorporated Companies

Companies formed under the Companies Act, 1956 are said to be registered companies. Such companies come into existence only after being registered under the Companies Act, 1956 and after a certificate of incorporation has been issued to them by the Registrar of Companies.

This method of forming a company is very common. Registered companies are of three types:

• Companies limited by shares: According to Section 12[2(a)], a company having the liability of its members limited by the memorandum to the amount (to the extent of face value of share subscribed by a member), if any, unpaid on the shares is a company limited by shares. A company limited by shares may be public or private.
  
  
• Companies limited by guarantee: Such companies may or may not have a share capital. According to Section [13(3)], in the case of liquidation of the company, each member has to pay a specified sum of money for the payment of debts and liabilities and this is mentioned in the Memorandum of Association.
  
  The amount promised by the member is called a ‘Guarantee’ as stated in Section 14 of the Act. Section 27 (2) of the Act relates to the articles of association of the company, and it states the number of members with which the company has to be registered.
  
  The liabilities of the members are limited to the extent of the guarantee and the face value of the shares subscribed by them (in case the company has share capital). A company limited by guarantee may be public or private.
  
  The amount of the guarantee is in the form of reserve capital of the company, and this reserve capital cannot be called upon except in the event the company winds up. Various non-profit companies that do not trade in stock exchanges are formed to promote art, culture, sports, religion, etc. Such companies are limited by guarantee.
  
  
• Unlimited companies: According to Section 12[2(c)], a company not having any limit on the liability of its members is called an unlimited company. Such companies may or may not have a share capital. If an unlimited company has a share capital, then it may be public or private.
  
  According to Section 27[1], in the case of an unlimited company, the articles shall state the number of members with which the company is to be registered and, if the company has a share capital, the amount of share capital with which the company is to be registered.

Classification of the Companies on the Basis of Number of Members

On the basis of number of members, a company may be classified into two categories, which are as follows:

• Private company
• Public company

Private Company

According to Section 3(1) (iii) of the Indian Companies Act, 1956, a private company means a company which, by its articles of association:

• restricts the right to transfer its shares, if any;
  
  
• limits the number of its members to fifty not including —
  
  
  • persons who are in the employment of the company, and
    
    
  • 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; and
    
    
• prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;

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

Section 12 of the Act also states that the minimum number of members to form a private company is two, and a private company should use ‘Pvt.’ after its name.

The shares of a private company are not freely transferable, and whenever a shareholder wants to transfer his/her shares, he/she must first approach the existing members of the company. The price of the shares is determined by the directors of the company.

Public Company

According to Section 3 [1(iv)] of Indian Companies Act, 1956, public company means a company which is not a private company.

The main differences between public and private companies are listed in Table:

Classification of the Companies on the Basis of Control

In terms of control, companies are classified into the following two groups:

Holding Company

According to Section 4(4) of the Companies Act, 1956, a company shall be deemed to be the holding company of another if, but only if, that other is its subsidiary. It means that a company will be called a holding company if it has control over another company.

A company may become the holding company of a company in any of the following three ways:

• If it holds more than 50% equity capital of another company (subsidiary)
  
  
• If it holds more than 50% of the voting rights of another company (subsidiary)
  
  
• If it has the right to appoint the majority of the directors of another company (subsidiary) either directly or indirectly

It must be noted that both holding and subsidiary companies are separate legal entities, but they are controlled by the holding company only. A holding company can have any number of subsidiaries.

Subsidiary Company

According to Section 4[I], a company shall, subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if, but only if

• that other controls the compositions of its Board of Directors; or
  
  
• that other holds more than half in nominal value of its equity share capital; or
  
  
• the first-mentioned company is a subsidiary of any company which is that other’s subsidiary.

In other words, a subsidiary is a company over which control is exercised by the holding company.

Classification of the Companies on the Basis of the Ownership of Companies

Government Companies

If the central or state government individually or in collaboration holds 51% or more of the paid-up capital of a company, then that company is said to be a government company. However, even if the government has 100% share in a government company, the company should not act as an agent of the government.

The government appoints the auditors for government companies after taking advice from the Comptroller and Auditor General of India (CAG). For example, National Thermal Power Corporation Ltd. (NTPC), State Trading Corporation Ltd. (STC), Hydroelectric Power Corporation Ltd. (HPCL), Bharat Heavy Electricals Ltd. (BHEL), etc., are some notable government companies.

Non-government Companies

Companies that are not owned by the government or its agencies are called non-government companies.

Classification of Companies on the Basis of the Nationality of the Company

Indian Companies

Such companies are registered in India under the Companies Act, 1956. These companies also have a registered office in India. However, the nationality of the members of these companies is not relevant.

Foreign Companies

Section 592 to Section 602 of the Companies Act, 1956 has provisions regarding the functioning of foreign companies in India. Foreign companies are those companies that have been registered outside India but have an established place from where they conduct their business in India. The place may be in the form of an office, a store house, or any other premises.