The Companies Act, 2013 governs the formation, functioning, and regulation of companies in India. Understanding the nature and types of companies is fundamental to studying business law and corporate governance.
Nature of a Company
A company is a legal entity formed by a group of people to carry on a business. It is registered under the Companies Act and recognized as a separate legal person distinct from its members.
Key Characteristics of a Company:
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Incorporated Association
A company must be registered under the Companies Act to exist legally. -
Separate Legal Entity
The company has its own identity separate from its shareholders.
Example: In Salomon v. Salomon & Co. Ltd., the court upheld the distinct identity of the company. -
Limited Liability
Members’ liability is limited to the unpaid amount on their shares. -
Perpetual Succession
The company continues to exist even if its members change or die. -
Transferability of Shares
In public companies, shares are freely transferable. -
Common Seal (optional post-2015 amendment)
It can act as the company’s official signature, although no longer mandatory.
Kinds of Companies
Under the Companies Act, 2013, companies can be classified based on various criteria:
a. On the Basis of Incorporation
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Statutory Companies
Formed by a special Act of Parliament or State Legislature.
Example: RBI, LIC. -
Registered Companies
Formed under the Companies Act by registration with the Registrar of Companies.
b. On the Basis of Liability
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Company Limited by Shares (Section 2(22))
Members are liable only up to the unpaid value of their shares.
Example: Most private and public companies. -
Company Limited by Guarantee (Section 2(21))
Members agree to contribute a fixed amount in case of winding up.
Example: Non-profit companies. -
Unlimited Company (Section 2(92))
Members have unlimited liability.
c. On the Basis of Number of Members
1. Private Company (Section 2(68))
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Minimum 2, maximum 200 members.
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Restricts the transfer of shares.
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Cannot invite public to subscribe to shares.
Example: ABC Pvt. Ltd.
2. Public Company (Section 2(71))
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Minimum 7 members; no maximum limit.
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Can invite the public to subscribe to shares.
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Shares are freely transferable.
Example: Reliance Industries Ltd.
3. One Person Company (OPC) (Section 2(62))
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Has only one person as a member.
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Offers limited liability with full control.
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Suitable for small businesses and entrepreneurs.
Example: A sole founder registering a business as OPC.
d. On the Basis of Control or Holding
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Holding Company
A company that controls another company (subsidiary) by owning a majority of its shares. -
Subsidiary Company
Controlled by another company (holding).
Example: If A Ltd. owns 80% of B Ltd., then A Ltd. is the holding company of B Ltd.
e. Other Special Types
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Government Company (Section 2(45))
At least 51% of paid-up share capital is held by the government.
Example: Bharat Heavy Electricals Ltd. (BHEL) -
Foreign Company (Section 2(42))
Incorporated outside India but operating in India. -
Section 8 Company (Non-profit company)
Promotes commerce, art, science, or charity without distributing profits.
Conclusion
The Companies Act, 2013 categorizes companies based on size, ownership, liability, and purpose. A clear understanding of the nature and kinds of companies is crucial as it forms the basis of company law. Each type serves a specific legal and economic purpose in the business ecosystem.