Published Thu, 15 Feb 2024 | Updated Thu, 15 Feb 2024 Corporate Law
Companies play a crucial role in the business landscape, providing a legal framework for entrepreneurs to pool resources and achieve common goals. In India, companies are regulated under the Companies Act of 2013, which classifies them based on various factors such as size, ownership structure, business activity, liability, and geographical scope. This article explores the different types of companies and their classification under the Companies Act 2013, providing valuable insights for entrepreneurs, investors, and professionals.
Understanding the factors influencing company classification under the Companies Act is crucial for businesses to ensure compliance and proper governance. In this article, we explore the key elements that determine how companies are classified and the implications of these classifications.
1. Legal Structure
The legal structure of a company is a fundamental factor in its classification. The Companies Act recognizes various forms, including private companies, public companies, and one-person companies. The legal structure not only defines the company's constitution but also dictates the extent of liability, ownership, and governance.
The classification of companies based on liability is an important aspect of corporate governance, determining the extent of responsibility and financial exposure for its members. Under the Companies Act, 2013, companies can be broadly categorized into those with limited liability and those with unlimited liability.
3. Ownership and Shareholding
Ownership structure plays a pivotal role in classification. Private companies, for instance, have restrictions on the transfer of shares and a limitation on the number of members. Public companies, on the other hand, can have an unlimited number of shareholders and their shares are freely transferable. The shareholding pattern influences the level of regulatory scrutiny and reporting requirements.
4. Size of the Company
In the dynamic landscape of corporate governance, the classification of companies based on their size plays a crucial role in determining the regulatory framework they operate within. The Companies Act, 2013, provides a structured approach to categorize companies into different sizes, each subject to specific compliance requirements.
5. Business Activity
The type of business activities a company undertakes significantly influences its classification. For instance, companies involved in specific sectors like banking, insurance, or other financial services are categorized as either engaging in banking and non-banking financial activities. Conversely, there are companies dedicated to non-profit activities. The classification under the Companies Act results in distinct regulatory frameworks for these varying types of companies.
6. Country of origin
The country of origin also plays a crucial role in classification. Companies operating within India but incorporated outside its borders are termed as foreign companies. These entities are subject to distinct laws and regulations outlined in the Companies Act. Compliance requirements for foreign companies are generally more stringent, encompassing rigorous registration and reporting procedures to ensure legal operation within the Indian jurisdiction.
A company, as defined under Section 2(20) of the Companies Act 2013, is a distinct corporate body with a separate legal identity and continuous existence. It is formed by a group of individuals who come together to achieve a common purpose. The company's capital is divided into smaller units called "shares," which represent ownership interests. A company has the ability to own assets, enter into contracts, and sue or be sued in its own name.
This classification ensures that distinct governance norms and compliance requirements are applied to each category. Following are the various types of companies classified based on their legal structure:
1. Private Company
A private company is a closely-held entity with restrictions on the transferability of its shares. The Companies Act imposes a limit of 200 members for a private company, excluding employees who are also members. Private companies are identified by the suffix "Private Limited" in their names. This legal structure fosters a more intimate and controlled ownership environment.
2. Public Company
Public companies, in contrast, have a wider shareholder base and their shares are freely transferable. There is no restriction on the maximum number of members for public companies, and they can invite the public to subscribe to their shares. Public companies are required to use the term "Limited" in their names, signaling their broader ownership structure.
3. One-Person Company (OPC)
Recognizing the rise of solo entrepreneurs, the concept of a One-Person Company (OPC) was introduced. An OPC is a private company with a single shareholder, combining the benefits of limited liability with the ability to manage the business independently. This legal structure caters to small businesses owned and managed by a single individual.
4. Section 8 Company
Section 8 companies are formed for promoting charitable objectives, including education, science, sports, or other charitable purposes. These companies are prohibited from distributing profits among members and are required to utilize their income for promoting their specified objectives. Section 8 companies are crucial in facilitating social and community development.
5. Producer Company
Producer companies are formed by farmers or producers with the primary aim of improving their income and livelihood. These companies can engage in various agricultural and related activities, pooling resources for the benefit of their members. The legal structure supports collective efforts in the agricultural sector.
Companies can be classified based on the liability of their members. There are three types of companies under this category:
1. Unlimited Companies
An unlimited company, as defined in Section 2(92) of the Companies Act 2013, is a company that does not have any limit on the liability of its members. In this type of company, the members are personally liable for the debts and obligations of the company. Their personal assets can be used to satisfy the company's debts.
2. Companies Limited by Guarantee
A company limited by guarantee, as defined in Section 2(21) of the Companies Act 2013, is a company in which the liability of its members is limited to the amount they undertake to contribute to the assets of the company in the event of its winding up. The members of such a company act as guarantors for the company's debts and obligations.
3. Companies Limited by Shares
A company limited by shares, as defined in Section 2(22) of the Companies Act 2013, is a company in which the liability of its members is limited to the amount, if any, unpaid on the shares held by them. This is the most common type of company where the liability of the shareholders is limited to the extent of their shareholding.
Companies can also be classified based on their ownership and management structure. The three main types of companies under this category are:
1. Public Companies
A public company, as defined in Section 2(71) of the Companies Act 2013, is a company that is not a private company. Public companies can invite the public to subscribe to their shares or debentures and have a minimum of seven members. They are subject to more extensive compliance requirements and regulatory scrutiny compared to private companies.
2. Private Companies
A private company, as defined in Section 2(68) of the Companies Act 2013, is a company that has a minimum paid-up share capital as prescribed by the Act. It restricts the right to transfer its shares and limits the number of its members to two hundred, excluding employees and ex-employees who are also shareholders. Private companies are not allowed to invite the public to subscribe to their shares or debentures.
3. One Person Companies (OPCs)
One Person Companies (OPCs) were introduced by the Companies Act 2013 to facilitate the formation of companies with a single member. An OPC can be formed with only one shareholder who is also the sole director. This type of company provides limited liability protection to the sole owner and combines the benefits of a private limited company with the ease of operations for single entrepreneurs.
Companies can also be classified based on size. Some of the common types of companies based on size are:
1. Micro, Small, and Medium Enterprises (MSMEs)
The Companies Act, 2013, introduced the concept of Micro, Small, and Medium Enterprises (MSMEs) to recognize and support businesses at different stages of growth. The classification is based on two criteria: investment in plant and machinery for manufacturing enterprises and investment in equipment for service enterprises. MSMEs enjoy certain benefits, including preferential treatment in government procurement, easier access to credit, and reduced compliance requirements.
2. Small Companies
The Companies Act defines small companies based on their paid-up capital and turnover. A company is considered small if:
Small companies benefit from reduced compliance requirements and exemptions from certain provisions applicable to larger entities.
3. Large Companies
Large companies are typically characterized by substantial capital, extensive operations, and significant market presence. The Companies Act imposes more stringent compliance requirements on large companies to ensure transparency, accountability, and protection of stakeholders' interests. Large companies are subject to comprehensive reporting and disclosure norms.
Companies can also be classified based on the nature of their business activity. Some of the common types of companies based on business activity are:
1. Profit-Making Companies
Profit-making companies are formed with the primary objective of generating profits for their shareholders or owners. These companies engage in various business activities, such as manufacturing, trading, services, or technology. They operate with the intention of earning revenues that exceed their expenses and aim to distribute profits among the shareholders or reinvest in business growth.
2. Non-Profit Companies
Non-profit companies are formed for promoting social objectives such as art, science, commerce, religion, charity, sports, education, research, or any other socially beneficial goals. These companies are registered under Section 8 of the Companies Act 2013 and must utilize their profits solely for promoting their stated objectives. Non-profit companies prioritize social welfare and do not distribute profits among their members.
3. Financial and NBFC Companies
Financial and Non-Banking Financial Companies (NBFCs) operate in the financial sector and provide financial services such as banking, insurance, credit, and other financial activities. These companies are regulated by specific legislation such as the Reserve Bank of India Act and the Insurance Act. Financial companies play a crucial role in the economy by providing financial services, managing risk, and facilitating economic growth.
Companies can also be classified based on their country of origin. The two main types of companies based on country of origin are:
1. Domestic Companies
Domestic companies are incorporated and registered in India and operate within the country's jurisdiction. They are subject to the regulations and compliance requirements of the Companies Act 2013.
2. Foreign Companies
Foreign companies are incorporated outside India but have a place of business or carry on business in India, either directly or through an agent. These companies are required to comply with specific registration, reporting, and compliance obligations under the Companies Act 2013.
Understanding the types and classification of companies under the Companies Act 2013 is essential for entrepreneurs, investors, and professionals. The classification based on liability, incorporation, ownership and management, business activity, and country of origin provides valuable insights into the diverse landscape of companies. By selecting the appropriate company type and complying with the associated regulations, stakeholders can establish a strong foundation for success in the corporate world. It is important to seek professional advice and stay updated with the Companies Act to ensure compliance and make informed decisions. By leveraging the benefits and fulfilling the obligations of each company type, entrepreneurs can contribute to a vibrant and sustainable business ecosystem in India.
Legal and financial experts at Companies Next can help you in streamlining the establishment and continuous operations of your business, ensuring adherence to the intricate regulatory framework, particularly concerning company classification under the Companies Act.