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.
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1. Classification of Companies Based on Size
A. Small Company
Definition: Defined under Section 2(85) of the Companies Act, 2013.
Criteria:
[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:
Relaxations:
- Exempt from preparing cash flow statements.
- Minimum of one board meeting in each half of the year.
- Simplified merger procedures.
Purpose: To reduce the compliance burden for small-scale businesses and promote ease of doing business.
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
- Includes large private companies, public companies, and multinational corporations.
- Governed by standard compliance requirements under the Companies Act.
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)
Definition: Defined under Section 2(62) as a company with only one member.
Key Features:
- Single membership.
- Nomination mechanism for successor.
- Simplified governance with exemptions from AGMs.
Limitations:
- Cannot engage in NBFC activities.
- A person can incorporate only one OPC at a time.
Purpose: Encourages sole proprietorship businesses to formalize operations with limited liability.
B. Private Company
Definition: Defined under Section 2(68) of the Companies Act, 2013.
Key Features of Private Company:
- Limited membership (2-200 members).
- Restrictions on share transfers.
- Prohibited from inviting public to subscribe for securities.
Purpose: Suitable for small and medium-sized businesses requiring operational flexibility and privacy.
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
Definition: Defined under Section 2(71) of the Companies Act, 2013.
Key Features of Public Company:
- No upper limit on membership.
- Shares freely transferable.
- Stricter compliance standards.
Purpose: Promotes large-scale investment and public participation.
Example: Companies like Tata Steel and Infosys are public companies where people can buy shares through stock exchanges.
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3. Classification of Companies Based on Control
A. Holding Company
Definition: Defined under Section 2(46) of the Companies Act, 2013.
Control Mechanisms:
- Holds more than 50% voting rights.
- Controls the subsidiary’s board composition (Board of Directors).
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
Definition: Defined under Section 2(87) of the Companies Act, 2013.
Restriction on Layers: Companies cannot have more than two layers of subsidiaries, with certain exemptions.
Example: Tata Motors is a subsidiary of Tata Sons.
C. Associate Company
Definition: Defined under Section 2(6) of the Companies Act, 2013.
Key Feature: Significant influence (owning at least 20% voting power).
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
Definition: Defined under Section 2(45) of the Companies Act, 2013.
Key Features:
- At least 51% of capital held by the government.
- Plays a role in strategic and essential industries.
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
Definition: Defined under Section 2(42) of the Companies Act, 2013.
Key Features:
- Incorporated outside India but has a business presence in India.
- Subject to compliance with local regulations.
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
Definition: Defined under Section 2(22) of the Companies Act, 2013.
Liability: Limited to the amount unpaid on the shares that the members (shareholders) hold.
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
Definition: Defined under Section 2(21) of the Companies Act, 2013.
Purpose: Limited to a pre-decided amount (called a "guarantee") that the members (shareholders) agree to contribute in case the company is wound up or liquidated. Often used for non-profit objectives.
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
Definition: Defined under Section 2(92) of the Companies Act, 2013.
Liability: Members are personally liable for all debts if the companies assets are insufficient.
5. Classification of Companies Based on Access to Capital
A. Listed Company
Definition: Defined under Section 2(52) of the Companies Act, 2013.
Key Features:
- Securities listed on recognized stock exchanges.
- Subject to stringent compliance norms.
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
- Not listed on any recognized stock exchange.
- Shares cannot be traded on NSE, BSE, or any other stock exchange.
- Greater operational flexibility.
- Lower compliance costs.
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!