What is a company?
Section 2 (20) of the Companies Act, 2013 defines a company incorporated under this Act or any other previous company law.
This definition does not clearly state the meaning of a company. In order to understand what a company is let us look at some explanations given by some authorities:
- “A corporation is an artificial being, invisible, intangible, existing only in the eyes of the law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. – Chief Justice Marshall
- “A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.” – Prof. Haney
Types of Companies
There are various forms of business that have become quite popular over the few years. The constant development of these resulted in the creation of many different types of companies. The companies are classified under 5 broad categories:
- Companies based on the Size
A company that can raise funds from the public is called a Public Company.
Section2(71) of the Companies Act defines a ‘public company”. They need to have a minimum of 7 members and the maximum number of members can be unlimited. A public company having limited liability must add the word “Limited” at the end of the name. Shares of a public company can be easily transferred.
II. Private Company
According to section 2(68) of the Companies Act, a “private company” has a paid-up capital as prescribed by its articles. Here, the maximum number of members should be 200. There is a restriction on the transfer of shares and such a company must add the word “Private” in its name at the end.
- Small Company
A company that doesn’t have its paid-up share capital of not more than 50 lakhs or a higher amount prescribed but not more than 10 crores and turnover of not more than 2 crores or as prescribed which shall not be more than 100 crores.
- One Person Company
This concept was introduced in The Companies Act 2013. These kinds of companies have only one member acting as the sole shareholder. Unlike other companies, they do not have any minimum share capital.
- Companies based on the Liability
I. Limited by Shares
A company where the liability of its members is limited to the number of unpaid shares, they hold is called a company limited by shares.
II. Limited by Guarantee
A company where the liability of its members is limited to the guarantee amount that they agreed to pay at the time of the company’s liquidation is called a company limited by guarantee.
III. Unlimited Company
Those companies where the liability of the members extends to the entire company’s debts and includes the personal assets of members for payment such company’s are called unlimited company.
- Companies based on the Control
A company is said to be a holding company in any of the following 3 ways:
- By holding more than 50% of the issued equity capital of the other company.
- By holding more than 50% of the voting rights of the other company.
- By holding the right to appoint the majority directors of the other company.
If in a company another company directly or indirectly holds more than half of it’s capital or position of control than such companies are called as subsidiary companies.
Those companies where other companies have significant influence are called as associate company. The amount of ownership of the other company amounts to at least 20% shares.
- Companies based on the Stock
A company whose securities are traded on an official stock exchange of India or outside India, is called as listed company. They must adhere to the requirements of the exchange.
Those companies whose shares are not listed on any stock exchange are called as unlisted companies. It can be said that the shares are privately owned. Since they are not listed they often do not have the opportunity to raise funds.
According to Section 2(45) of the Companies Act, 2013 any company which has equal to or more 51% of the paid-up share capital owned by the State government or Central government or partly both then such companies are called as government companies. Their annual reports have to be presented in both the houses of Parliament.
A company which is incorporated outside India but has a place of business in India such companies are known as Foreign companies. As per Section 379 of the Companies Act 2013, where not less than 50% of the paid-up share capital, of a foreign company is held by one or more citizens of India or one or more companies that are incorporated in India.
III. Charitable Companies
Those companies which are registered under section 8 of the Companies act and their objectives have charitable purpose are called as charitable companies. They do not earn profits nor pay dividends to their members. They are also called as Non-Profit Organizations.
A company formed to borrow and lend money among it’s members and is a Non-Banking Financial Corporation is called as a Nidhi company. It’s function is to promote thrift and saving among its members.
Those companies formed for future projects and do not have accounting transactions nor carry out all compliances like a regular company are called Dormant companies. They are basically inactive or not inoperative mode.