Classification of Companies in India

Have you ever wondered how businesses are structured and why different companies have different names like 'Private Limited' or 'Limited' after their name?

The way companies are classified is essential for running and managing them efficiently. Under the Companies Act of 2013, companies are divided into several categories based on size, membership, control, liability, and access to capital.

This blog explains each type of company’s classification with simple explanations and real-life examples. So, if you're planning to start a company or are simply curious about how businesses are structured, keep reading!

What is a Company?

According to Section 2(20) of the Companies Act 2013, a company is a legal entity formed and registered under the Act or any previous company law. It is considered a "separate legal entity," which means the company has its own rights, liabilities, and responsibilities distinct from its owners. This separation typically protects the personal assets of business owners.

To make business operations smooth and efficient, companies are classified into different categories. Let’s explore each of them one by one.

1. Classification of Companies Based on Size

A. Small Company

A small company is a type of company that enjoys benefits, like fewer compliance requirements which helps in rapid growth of the business. This classification encourages small business owners to register their companies formally.

Definition (Section 2(85)): A small company is any company other than a public company.

Any company will be considered as a small company if it meets the following criteria:

• Paid-up share capital: Should not be less than ₹50 lakhs and can never exceed ₹10 crore.
• Turnover: Should not be less than ₹2 crores and never exceed ₹100 crores in the preceding financial year.

[Paid-up Capital is the total money paid by shareholders for shares, for example Aditya issues 100 shares @ ₹10 each = ₹1,000 paid-up capital]

Exclusions: The following companies cannot be classified as small companies:

• Holding or subsidiary companies
• Section 8 companies (non-profit organizations)
• Companies governed by Special Acts

Benefits of Small Companies:

• No need to prepare cash flow statements.
• Fewer board meetings — only one meeting per half of the year is required.
• Simplified merger procedures under Section 233.

Example: If you are running a small boutique with a turnover of ₹5 crores and a paid-up capital of ₹2 crores, you can register it as a "Small Company."

Recent Changes in Small Company Definition: Initially, the threshold for a small company was a paid-up capital of ₹50 lakh and turnover of ₹2 crores. This has been increased to ₹2 crores for paid-up capital and ₹20 crores for turnover, making more companies eligible for "small company" status.

B. Other Companies

If a company does not meet the criteria of a small company, it is categorized as "Other Companies." These include large private companies, public companies, and multinational corporations (MNCs).

Example: Tata Motors or Infosys do not qualify as small companies due to their large turnover and size.

2. Classification of Companies Based on Membership

A. One Person Company (OPC)

An OPC is a concept introduced under Section 2(62) of the Companies Act, 2013. It allows an individual to start a company without needing a partner or co-owner.

Key Features of OPC:

• It has only one member who controls the entire business.
• The owner must appoint a nominee to take over in case of the owner’s death or incapacity. A nominee is a person who takes over if the member dies.
• No need for Annual General Meetings (AGMs) (Section 96).

B. Private Company

A private company, defined under Section 2(68), is a closely held company. It is not open to the public and has a restricted number of members.

Key Features of Private Companies:

• Minimum 2, Maximum 200 members.
• Minimum 2 directors and a maximum of 15 directors.
• Restrictions on transferring shares.
• Cannot raise funds from the public.
• Includes 'Private Limited' (Pvt. Ltd.) in its name.

Recent Changes in Removal of Paid-Up Capital Requirement: Earlier, there was a requirement for private companies to have a minimum paid-up capital of ₹1 lakh, but this requirement has been removed under the Companies (Amendment) Act, 2015.

C. Public Company

Defined under Section 2(71), a public company allows the public to invest in its shares, and its shares are freely transferable.

Key Features of Public Companies:

• Minimum 7 members; no maximum limit.
• Must have at least 3 directors and a maximum of 15 directors.
• No restrictions on transferring shares.
• Can raise funds from the public.

Example: Companies like Tata Steel and Infosys are public companies where people can buy shares through stock exchanges.

3. Classification of Companies Based on Control

A. Holding Company

Defined under Section 2(46), a holding company controls other companies called subsidiaries. It holds more than 50% of voting rights or controls the composition of the Board of Directors.

A holding company controls a subsidiary by owning more than 50% of its voting rights or controlling the majority of its board of directors. This allows the holding company to influence key decisions of the subsidiary.

Example: Tata Sons is a holding company that controls several subsidiaries like Tata Consultancy Services (TCS), Tata Steel, and Tata Motors. Although these companies operate independently, Tata Sons influence their decision-making and strategy.

B. Subsidiary Company

A Subsidiary Company, defined under Section 2(87), is a company controlled by a Holding Company. Control is usually achieved through ownership of more than 50% of the shares or through control over the Board of Directors. The holding company can make strategic decisions for the subsidiary and influence its policies.

Example: Tata Motors is a subsidiary of Tata Sons.

C. Associate Company

As per Section 2(6), an Associate Company is a company in which another company has a "significant influence", but it does not have control over it. This relationship is different from a subsidiary company because the holding company does not control the associate company.

The term "significant influence" is crucial in identifying an associate company.

As per the Companies Act 2013, significant influence means:

• Holding at least 20% of the total voting power in another company.
• Control over business decisions under an agreement.

Note: Having significant influence does not mean controlling the company.

Example: ICICI Bank and ICICI Prudential. ICICI Bank owns 30% of the shares in ICICI Prudential Life Insurance. Since ICICI Bank holds more than 20% of the voting rights (but less than 50%), ICICI Prudential is classified as an associate company of ICICI Bank.

D. Government Company

Defined under Section 2(45), a Government Company is controlled by the Central Government, State Government, or both. The government exercises control over these companies by holding at least 51% of the paid-up share capital.

Example: LIC (Life Insurance Corporation of India)—The Government owns 96.5% of its shares and controls insurance services in India. BHEL (Bharat Heavy Electricals Limited)—The Government owns 63.17% and manufactures power generation equipment.

E. Foreign Company

As per Section 2(42), a foreign company is controlled by its parent company or head office located outside India. While it may operate in India, the ultimate control lies with its foreign parent.

Example: Google India Pvt. Ltd., Controlled by Google LLC (USA), operates search engines, YouTube, and online advertising; Microsoft India Pvt. Ltd., Controlled by Microsoft Corporation (USA), provides software, cloud services, enterprise tools, etc.

4. Classification of Companies Based on Liability

A. Company Limited by Shares

A company limited by shares, defined under Section 2(22), is one in which the liability of its members (shareholders) is limited to the amount unpaid on the shares they hold. This means that shareholders are only responsible for paying the amount that remains unpaid on their shares, and they cannot be asked to pay more than that.

Example: If you buy 100 shares at ₹10 each and have paid ₹8 per share, you only owe ₹2 per share.

B. Company Limited by Guarantee

Defined under Section 2(21), a company limited by guarantee is one where the members' liability is limited to a pre-decided amount (called a "guarantee") that they agree to contribute in case the company is wound up.

Unlike companies limited by shares, these companies do not have share capital. Instead, members provide a guarantee to pay a certain amount toward the company’s debts if it is closed or liquidated. Clubs or non-profit organizations often fall into this category.

Example: A sports club is registered as a company limited by guarantee. Each of its 20 members agrees to pay ₹5,000 if the club is liquidated. Each member will only have to contribute ₹5,000. They are not required to pay anything more than this pre-decided guarantee.

C. Unlimited Company

An unlimited company, as per Section 2(92), is a company in which the liability of its members is unlimited. If the company faces insolvency or liquidation, the members are responsible for paying off the entire debt of the company.

This means that if the company’s assets are insufficient to pay off debts, the members' personal property (like their house, car, etc.) may be used to settle the debts. Unlimited companies are rare, but they exist in high-risk ventures.

5. Classification of Companies Based on Access to Capital

A. Listed Company

As per Section 2(52), a Listed Company is a company that lists its shares on a recognized stock exchange (like NSE, BSE, or international exchanges like NYSE) and allows the general public to buy and sell its shares freely.

When a company is "listed," it means that its shares are publicly traded, and anyone can buy or sell the shares through a stock exchange. The company raises money from the public by offering shares in an Initial Public Offering (IPO).

Example: Here are some of the most famous listed companies in India:

• Reliance Industries (Listed on NSE & BSE)
• Tata Consultancy Services (TCS) (Listed on NSE & BSE)
• Infosys (Listed on NSE & BSE)
• HDFC Bank (Listed on NSE & BSE)
• Adani Enterprises (Listed on NSE & BSE)

B. Unlisted Company

Defined under Section 230, an Unlisted Company is a company whose shares are NOT listed on any recognized stock exchange. Unlike listed companies, their shares cannot be traded on NSE, BSE, or any other stock exchange.

These companies can raise money privately from investors like venture capitalists, angel investors, or private equity firms. Most startups, family-run businesses, and early-stage ventures are unlisted companies.

Example: Many well-known companies remain unlisted because they prefer to maintain control and privacy and avoid compliance burdens.

• Zomato (before listing) – Zomato was an unlisted company before it went public in 2021.
• Byju's – Byju's is one of the largest unlisted edtech companies in India.
• Swiggy – Swiggy is a popular food delivery platform and is currently an unlisted company.
• Flipkart (before its acquisition) – Before Walmart acquired Flipkart, it was a large unlisted company.
• Oyo Rooms – Oyo Rooms, one of the largest hospitality chains, is currently unlisted.

Conclusion

The Companies Act of 2013 provides a well-defined structure for classifying companies based on size, membership, control, liability, and access to capital. Each classification has its own purpose, benefits, and obligations. By understanding these classifications, entrepreneurs can make informed decisions about how to structure their businesses.

If you’re planning to start your own business, it’s important to choose the right type of company that suits your needs. Each type of company has its own advantages, compliance rules, and liabilities. With this knowledge, you can decide if you want to be a one-person entrepreneur, run a private family business, or aim for the big leagues as a public company. Choose wisely and grow smartly!