Trading in India dates back to the era of the East India Company. The first ever English organization with which the term “company” was associated was ‘merchant adventures’ for trading overseas. This term ‘company’ is derived from the Latin word (Com = with or together & panis = bread), originally meaning associating persons who took their meals together. So, in the beginning, the concept of trading was separate for each member with their own stocks.
However, afterwards, they started to operate on a joint account with a joint stock. This process was seen and adapted in the development of the famous East India Company, which received its first charter in 1600, granting it a monopoly of trade with the Indies.
Discussing the present times, gone are the days when sole proprietorship and partnership were the most preferable form of business where people used to invest and earn profits only for themselves. Several types of companies evolved with time. This article discusses the types of companies under the Companies Act, 2013, which differentiates on the basis of the number of members, size, liability and many more. So, let’s get started.
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Classification of Companies
Classification of a company is done on the basis of several factors:
Companies based on Liabilities
Companies Limited by Shares: In such types of companies, shares are issued to the public by way of Initial Public Offerings (IPO). These companies are called limited companies in India and public limited companies (PLC) in the commonwealth countries and Great Britain, which is known as ‘Inc’ in the USA.
Companies Limited by Guarantee: There are some businesses wherein the memorandum of association (MoA) specifies monetary amounts that some members agree to pay. They will only be obligated to pay the guaranteed sum if the company is liquidated.
Example: Clubs, sports associations, students' unions, workers' co-operatives, and NGOs may also form guarantee companies as these do not distribute profits to their members nor divide their assets into shares.
Unlimited Companies: It is a type of private company. The liabilities of members of unlimited companies have zero limits. Consequently, the corporation can use all of the shareholders’ personal assets to pay off its debts while it is winding up. Their responsibilities will include the entire company’s debt.
Is Apple a limited or unlimited company?
Apple is a Public Limited Company, founded by Steve Jobs and Steve Wozniak in 1976, to design, develop and sell their goods worldwide.
Companies on the Basis of Members
One-Person Companies (OPCs): As the name suggests, these businesses' shareholders are only one person. This person can also be the director of the company. These are different from sole proprietorships since these are legal entities apart from their sole members. Also, it does not require a minimum share capital.
Minimum number of directors- 1
Maximum number of directors- 15
Private Companies: The articles of association (AoA) of private companies limit the transferability of shares, the members (shareholders) cannot transfer their shares for free, and these members here can be both current and previous employees who even own shares. Also, there has to be a minimum of 2 members and not more than 200 members.
Minimum number of directors- 2
Maximum number of directors- 15
Public Companies: Unlike private companies, public companies allow their members (Shareholders) to transfer shares for free. These companies must have a minimum of 7 members, with no limit on the maximum number of members. The general public can hold the company shares.
Minimum number of directors- 3
Maximum number of directors- No limit
Companies on the Basis of Control
Holding and Subsidiary Companies: Some cases can be witnessed where a company’s shares may be held entirely or partially by another company. The company which owns these shares is now called the holding or parent company. Similarly, a subsidiary is a company whose shares are owned by the parent company.
Example: Tata Sons Limited (the owner of the Tata name & the trademarks) is the holding company of the Tata Group and holds the bulk of shareholding in these companies.
Example: Joint Venture Company
Companies Based on Size
The MSME Act classifies companies on the basis of their size to give benefits provided by the government for MSMEs. The differentiation is as follows:
These are those companies whose investment in plant and machinery does not exceed Rs.1 crore, & the annual turnover does not exceed Rs.5 crore.
Under the Companies Act, 2013, Small Companies are introduced to promote economic development and generate employment for society. A company with a maximum paid-up share capital of Rs.4 crore and a maximum turnover of Rs.40 crore is considered a small company under the Companies Act. These companies are also vested with several benefits under the Companies Act, 2013.
Small & Medium sized Companies
It means an unlisted company (may be private or public) which is not a bank/ or financial institution or an insurance company whose turnover and borrowings don’t exceed INR 250 crore and INR 50 crore respectively
Other Types of Companies
Government Companies: These companies have more than 50% of share capital held by the central or state governments, or jointly owned by both governments.
Foreign Companies: These are companies present outside India, but they also conduct business in India, either on their own or by collaborating with other companies.
Charitable Companies (Section 8): Companies with charitable goals, also known as NPOs, are thus charitable companies. These companies are also known as Section 8 companies as they are registered under the said provision in the Companies Act, 2013, It works with an aim to promote religion, arts, culture, science, education, commerce, and many more. Remember that they do not pay money to their members as they don’t make any.
Dormant Companies: These companies are established to work for future projects. They do not have large accounting transactions and are not needed to comply with all the regulations which apply to regular companies.