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Company: Introduction and types

Updated: Jun 9



INTRODUCTION

The word “Company” is derived from the Latin (Com= with or together, panis= bread), and originally referred to an association of persons who took their meals together.

In popular parlance, company denotes an association of like-minded persons for the purpose of carrying on some business or undertaking.

It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality and so turn it into a corporation. (The word “Corporation” is derived from the Latin term “corpus” which means “body”).Accordingly, “corporation” is a legal person created by the process other than natural birth. It is for this reason, it is called as an artificial person. This corporate being is capable of enjoying many of the rights and many of the liabilities of a natural person- a human being.

As per section 2(20) of the Companies Act, 2013 “Company” means a company incorporated under Companies Act, 2013 or under any previous company law.


CHARACTERISTICS OF A COMPANY WERE AS FOLLOWS:-

· Corporate Personality

· Limited Liability

· Perpetual Succession

· Transferability of shares

· Separate Property

· Common seal

· Capacity to sue and be sued

TYPES OF COMPANIES

The Companies Act, 2013 provides for a variety of companies of which can be promoted and registered under the Act. These companies were:-


Ø CLASSIFICATION OF COMPANIES BY MODE OF INCORPORATION

Depending on the mode of incorporation, there are three classes of joint stock

Companies

- Chartered Companies. These are incorporated under a special charter by a monarch. The East India Company and The Bank of England are examples of chartered incorporated in England. The powers and nature of business of a chartered company are defined by the charter which incorporates it. A chartered company has wide powers. It can deal with its property and bind itself to any contracts that any ordinary person can. In case the company deviates from its business as prescribed by the charted, the Sovereign can annul the latter and close the company. Such companies do not exist in India.


- Statutory Companies. These companies are incorporated by a Special Act passed by the Central or State legislature. Reserve Bank of India, State Bank of India, Industrial Finance Corporation, Unit Trust of India, State Trading corporation and Life Insurance Corporation are some of the examples of statutory companies. Such companies do not have any memorandum or articles of association. They derive their powers from the Acts constituting them and enjoy certain powers that companies incorporated under the Companies Act have. Alternations in the powers of such companies can be brought about by legislative amendments. The provisions of the Companies Act shall apply to these companies also except in so far as provisions of the Act are inconsistent with those of such Special Acts [Sec 616 (d)] These companies are generally formed to meet social needs and not for the purpose of earning profits.

- Registered or incorporated companies. These are formed under the Companies Act, 1956 or under the Companies Act passed earlier to this. Such companies come into existence only when they are registered under the Act and a certificate of incorporation has been issued by the Registrar of Companies. This is the most popular mode of incorporating a company. Registered companies may further be divided into three categories of the following.


1. Companies limited by Shares: These types of companies have a share capital and the liability of each member or the company is limited by the Memorandum to the extent of face value of share subscribed by him. In other words, during the existence of the company or in the event of winding up, a member can be called upon to pay the amount remaining unpaid on the shares subscribed by him. Such a company is called company limited by shares. A company limited by shares may be a public company or a private company. These are the most popular types of companies.


2. Companies Limited by Guarantee: These types of companies may or may not have a share capital. Each member promises to pay a fixed sum of money specified in the Memorandum in the event of liquidation of the company for payment of the debts and liabilities of the company [Sec 13(3)] This amount promised by him is called ‘Guarantee’. The Articles of Association of the company state the number of member with which the company is to be registered [Sec 27 (2)]. Such a company is called a company limited by guarantee. Such companies depend for their existence on entrance and subscription fees. They may or may not have a share capital. The liability of the member is limited to the extent of the guarantee and the face value of the shares subscribed by them, if the company has a share capital. If it has a share capital, it may be a public company or a private company.

The amount of guarantee of each member is in the nature of reserve capital. This amount cannot be called upon except in the event of winding up of a company. Non-

trading or non-profit companies formed to promote culture, art, science, religion, commerce, charity, sports etc. are generally formed as companies limited by guarantee.

3. Unlimited Companies: Section 12 gives choice to the promoters to form a company with or without limited liability. A company not having any limit on the liability of its members is called an ‘unlimited company’ [Sec 12(c)]. An unlimited company may or may not have a share capital. If it has a share capital it may be a public company or a private company. If the company has a share capital, the article shall state the amount of share capital with which the company is to be registered [Sec 27 (1)]

The articles of an unlimited company shall state the number of member with which the company is to be registered.

Ø On the Basis of Number of Members

On the basis of number of members, a company may be Private Company and Public Company.

- Private Company

According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company is that company which by its articles of association .Limits the number of its members to fifty, excluding employees who are members or ex-employees who were and continue to be members; restricts the right of transfer of shares, if any; prohibits any invitation to the public to subscribe for any shares or debentures of the company. Where two or more persons hold share jointly, they are treated as a single member.

According to Sec 12 of the Companies Act, the minimum number of members to form a private company is two. A private company must use the word “Pvt” after its name. Characteristics or Features of a Private Company. A private company cannot invite the public to subscribe for its capital or shares of debentures. It has to make its own private arrangement.

- Public company

According to Section 3 (1) (iv) of Indian Companies Act. 1956 “A public company which is not a Private Company”, If we explain the definition of Indian Companies Act. 1956 in regard to the public company, we note the following: The articles do not restrict the transfer of shares of the company It imposes no restriction no restriction on the maximum number of the members on the company. It invites the general public to purchase the shares and debentures of the companies

Ø On the basis of Control

On the basis of control, a company may be classified into Holding companies and Subsidiary Company


- Holding Company [Sec. 4(4)]. A company is known as the holding company of another company if it has control over the other company. According to Sec 4(4) a company is deemed to be the holding company of another if, but only if that other is its subsidiary.

A company may become a holding company of another company in either of the following three ways these are by holding more than fifty per cent of the normal value of issued equity capital of the company; or By holding more than fifty per cent of its voting rights; or by securing to itself the right to appoint, the majority of the directors of the other company, directly or indirectly.

The other company in such a case is known as a “Subsidiary company”. Though the two companies remain separate legal entities, yet the affairs of both the companies are managed and controlled by the holding company. A holding company may have any number of subsidiaries. The annual accounts of the holding company are required to disclose full information about the subsidiaries.


- Subsidiary Company.[Sec. 4 (I)]. A company is known as a subsidiary of another company when its control is exercised by the latter (called holding company) over the former called a subsidiary company. Where a company (company S) is subsidiary of another company (say Company H), the former (Company S) becomes the subsidiary of the controlling company (company H).

Ø On the basis of Ownership of companies


- Government Companies. A Company of which not less than 51% of the paid up capital is held by the Central Government of by State Government or Government singly or jointly is known as a Government Company. It includes a company subsidiary to a government company. The share capital of a government company may be wholly or partly owned by the government, but it would not make it the agent of the government. The auditors of the government company are appointed by the government on the advice of the Comptroller and Auditor General of India. The Annual Report along with the auditor’s report are placed before both the House of the parliament. Some of the examples of government companies are - Mahanagar Telephone Corporation Ltd., National Thermal Power Corporation Ltd., State Trading Corporation Ltd. Hydroelectric Power Corporation Ltd. Bharat Heavy Electricals Ltd. Hindustan Machine Tools Ltd. etc.


- Non-Government Companies. All other companies, except the Government Companies, are called non-government companies. They do not satisfy the characteristics of a government company as given above.

Ø On the basis of Nationality of the Company


- Indian Companies: These companies are registered in India under the Companies Act. 1956 and have their registered office in India. Nationality of the members in their case is immaterial.

- Foreign Companies: It means any company incorporated outside India which has an established place of business in India [Sec. 591 (I)]. A company has an established place of business in India if it has a specified place at which it carries on business such as an office, store house or other premises with some visible indication premises. Section 592 to 602 of Companies Act, 1956 contains provisions applicable to foreign companies functioning in India.

Ø One Person Company

This is a type of company that has only one member. OPC provides the benefits of both forms of business- Proprietorship and Company. With formation of an OPC business can be run in the same way as a proprietorship by complying with law and keeping the liability of the member limited by shares or guarantee.

Provisions of OPC under Companies Act 2013 are all the provisions of the Act applicable to private companies shall also be applicable to OPC unless otherwise excluded from compliance. It should be treated as a private company for all legal purposes. The name of the company shall include the words ‘One Person Company’ within brackets below the name of the company. The person forming an OPC has to nominate a person with that person’s written consent as a nominee of the OPC. It should have a maximum of 15 directors, and they aren’t required to retire by rotation.[1]

Ø Associate Company

“Associate Company” as in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a Joint Venture Company. “Significant Influence” means control of at least 20% of total share capital but less than 50% of share capital by another company, or control of business decisions under an agreement.

Ø Small Company

Small company means a company, other than a public company, whose paid-up share capital doesn’t exceed Rs. 50 lakhs or such higher amount as may be prescribed. Turnover of which as per its last P&L A/C doesn’t exceed Rs. 2 crore or such higher amount as may be prescribed.

However, a small company cannot be a holding or a subsidiary company a company registered under section 8 of the 2013 Act. A company or body corporate governed under any special Act.

Exemptions of a small company: Financial statements may not include the cash flow statement. The annual return shall be filed by director and company secretary or when there is no company secretary, by two directors. It is sufficient if at least one meeting of the Board of Directors has been conducted in each half of a calendar year.

Ø Produce Company

It means a body corporate having objects or activities specified in section 581B and deals primarily with the produce of its active Members for carrying out any of its specified objects.

The objects of producer companies shall include one or more of the eleven items specified in the Act, the more important being: Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of members or import of goods or services for their benefit; Processing including preserving, drying, distilling, brewing, venting, canning and packaging of produce of its members; and Manufacture, sale or supply of machinery, equipment or consumables mainly to its members. Rendering technical or consultancy services, generation, transmission and distribution of power and revitalization of land and water resources; promoting techniques of mutuality and mutual assistance; Welfare measures and providing education on mutual assistance principles.


Ø Dormant Company

Where a company is formed and registered under this Act for a future 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 Registrar in such manner as may be prescribed for obtaining the status of a dormant company. Inactive company means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.

Ø Charitable Companies (Section 8)

Certain companies have charitable purposes as their objectives. These companies are called Section 8 companies because they are registered under Section 8 of Companies Act, 2013.

Charitable companies have the promotion of arts, science, culture, religion, education, sports, trade, commerce, etc. as their objectives. Since they do not earn profits, they also do not pay any dividend to their members.

Ø Nidhi Companies

A Nidhi company functions to promote the habits of thrift and saving amongst its members. It receives deposits from members and uses them for their own benefits.


Ø Public Financial Institutions

Life Insurance Corporation, Unit Trust of India and other such companies are treated as public financial institutions. They are essentially government companies that conduct functions of public financing.[2]

Ø Investment Companies

As per explanation (a) to section 186, “Investment Company” means a company whose principal business is the acquisition of shares, debentures or other securities.

An investment company is a company, the principal business of which consists of acquiring, holding and dealing in shares and securities. The word ‘investment’, no doubt, suggests only the acquisition and holding of shares and securities and thereby earning income by way of interest or dividend etc.

But investment companies in actual practice earn their income not only through the acquisition and holding but also by dealing in shares and securities i.e. to buy with a view to sell later on at higher prices and to sell with a view to buying later on at lower prices.

If a company is engaged in any other business to an appreciable extent, it will not be treated as an investment company.

The following two sets of legal opinions are quoted below as to the meaning of an investment company:

  1. According to one set of legal opinion, an “investment company” means a company which acquires and holds shares and securities with an intent to earn income only from them by holding them. On the other hand, another school of legal opinion holds that “an Investment Company means a company, which acquires shares and securities for earning income by holding them as well as by dealing in such shares and other securities”.

  2. According to Section 2(10A) of the Insurance Act, 1938, an investment company means a company whose principal business is the acquisition of shares, stocks, debentures or other securities.[3]

Harshal Jadhav & Associates is a full service law firm practicing into corporate law along with various branches of law. The firm's website is www.hjlegal.in


This article is written by Mr. Tarun Verma, Associate Intern, Harshal Jadhav & Associates

[1] https://www.lawyered.in/legal-disrupt/articles/types-companies-india-detailed-breakdown/ [2] https://www.toppr.com/guides/principles-and-practices-of-accounting/intro-to-company-accounts/types-of-companies/ [3] https://www.legalbites.in/types-of-company/#producer

#companylaw #typesofcompanies

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