Company Law - Classification of Companies

Introduction

 

Do you know the difference between Yes Bank and State Bank of India ? One is Government Company, other one is Non-government company. That apart, Yes Bank almost got bankrupt and had to bailed out with Government bank money.. :)

There are different types of company. Tons of types defined in Company Act, 2013. We will cover  below classification of companies.  These companies are classified based on below criteria.

1. Classification based on Liability
2. Classification based on numbers of Members.
   
3. Classification based on Ownership
4. Classification based on Control
5. Other Kinds of Companies like Nidhi, Dormant, Section 8 etc.

Classification Based on Liability

There are three different types of companies based on liability. They are

1. Limited By Share
2. Limited By Guarantee
3. Unlimited

Limited By Share

It's defined in Section 2(22). For this Company, liability is up to unpaid amount on share capital. 

What is that ?  

Assume XXX Ltd issues 100 shares at the price of 100 Rs each. While issuing shares they call 75% values, meaning they allocated shares for 75 Rs stating to shareholder that they will call(ask) remaining 25 Rs on Diwali. This 25 Rs is unpaid amount. And liability of the shareholder will be up to only 25 Rs. If company goes bust and they Company needs to pay money to others, shareholder will be liable to pay up to 25 Rs per share which is unpaid amount on share capital.

Shareholders are kind of safe here. They get profits, but risk? it's not much..!! However shareholders are co owners of company not owners of assets of company. It's not like that you buy Tata Motors share and says "All Tata Nexons are mine". Remember company has separate existence and identity.

Limited By Guarantee

Here member of company says, "Ok, if company goes bust or wounded up, I guarantee to pay up to 1 Crore Rupees to pay up the debts or liability".

It's defined in section 2(21) as :

a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up

Here members cannot be asked to pay more than what they have given guarantee for. Also very very important, member can be asked to pay guaranteed amount ONLY in case company is wounded up. If it's operating fine, members cannot be asked..

Do you see any Similarity with Limited By Share company? Yes, both have LIMITED liability.

Do you see any Difference ? Yes, in Limited by Share company, unpaid money can be asked at any time, however in case of companies limited by Guarantee, members can be asked only in case company is wounded.

Unlimited Company

Such company have unlimited liability or members have to pay from their pocket, from their account if Company goes bust.

Act provides definition under Section 2(92) as

a company not having any limit on the liability of its members

Amway is one of famous private company with unlimited liability. These liability extends up to person holds membership. If he ceases to member, his liabilities also ceases.

Article of Associations of such companies typically states how much each members owns. I mean if X owns 30% ownership, he will be liable up to 30% debt. He cannot be asked to pay entire debt. So this liability is distributed based on proportionate ownership of each member.

Here is question. Why would anyone go for unlimited company to risk his personal asset when other option is available?

Because it has some benefits which might suits some business or to some businessmen. These benefits are as follow

1. Relaxation in regulatory stuff like Auditing, board meeting and what not
2. Confidentiality
3. Flexible share capital meaning share capital can be increased/reduced without much restriction
4. Can be registered without share capital

Classification based on the number of members

One Person Company

Section 2(62) defines one person company as 

―One Person Company means a company which has only one person as a member;

Such company can be incorporated by Single person. It's added so that formalization of business can be increased. This will help more entrepreneurship.

Minimum share capital for OPC is 1 Lakh Rupees.

What about Sole proprietorship ? How this is different from Sole Proprietorship ?

In sole proprietorship there is not distinction between owner and company, whereas you must know COMPANY IS DISTINCT ENTITY. In sole proprietorship liability is unlimited which is not the case in one person company.

One Person Company is private company as per section 3(1)(c).

OK. But what is private company ?

Private Company

Section 2(68) defines what is private company. It's really lengthy definition.

There are 3 characters of Private Company

1. Minimum paid up capital is 1 Lakh Rupees
2. Through Article of Association it restricts the right of transfer of shares
3. Maximum number can be 200

There are more things in Private Company. How do you calculate that 200 members ? Below are some points in that regard:

1. If you and your wife jointly holds a share, you will be one member and one SOUL!
2. If you are employed in Company, you will not be counted as member, whether you were employed in past, or employed currently. 

Can Private company do IPO, answer is NO. These company cannot invite public for investment.

What are similarities and difference between One Person Company and Private Company? Figure that out..!!

 Small Company

Small company is really a small company.

Section 2(85) defines small company.

Below are important things about small company.

• It's not public company
• Paid up share capital cannot exceed  50 Lakhs. This maximum limit can be increased by Government, but it cannot exceed 5 Crore. If they want to increase than this, they have to amend the Act.
• Turnover as per last profit and loss account should not exceed 2 Crore. This amount can be increased but cannot be increased beyond 20 Crore.

So Paid Up Capital and Turnover are important aspect.

Some important aspect about Small Company

1. Holding company cannot be termed as small company
2. Section 8 Company is not a small company even if they pass turnover and paid up capital criteria
3. Companies or body corporate governed by Special act, then those are not small company.

So, we said Small Company is not a Public Company. What is Public Company ?

Public Limited Company

Section 2(71) defines what is public company.

Three important things

1. It's not private company. Of Course but anyways Section 2(71) mentions this. :D
2. Minimum Paid Capital should be at least 5 Lakh
3. At least 7 members required for formation

 We will see Holding and Subsidiary Company shortly, but this section mentions that even if Subsidiary company is private company but it's Holding company is Public company then subsidiary company will be deemed to be Public company.

Here is an example.Hypothetical example.

Reliance Industries Limited is public company. JIO is private company subsidiary company of Reliance Industries Limited. So as per this section JIO is also public limited company.

Classification based on the Control

Holding Company and Subsidiary Company

Actually both of above companies are relative. If there is one subsidiary company, then there must be some Holding company. Subsidiary company cannot exist in isolation. This is so obvious.

Here is an example. Reliance Industries Limited is Holding Company of JIO. JIO in this case is subsidiary company.

Section 2(87) defines what is subsidiary company.

It defines with relation to other company, where such other company

1. Control the composition of Board Of Directors
2. Control more than 50% of share capital.

Above things can be done by Holding company on it's own or together with it's subsidiaries.

How do you know one company is controlling board of directors of other company ? 

When Holding company by some power like agreement can appoint or remove MAJORITY of directors in subsidiary company. 

Shares held in fiduciary capacity or trust is not counted for Point 2 above.

If company is in the business of money lending and they accept the shares as security, then such shares will not be counted for "holding of more than one-half of share capital" clause.

Shares collected in course of normal business transaction, then such holding cannot be calculated to determine whether other company which got shares is holding company.

"C" is subsidiary of "B" and "B" is subsidiary of "A", then both "B" and "C" are subsidiary of "A".

Remember Ownership doesn't give right to structure Board of directors, hence even if company owns substantial shares in other company but don't have power to compose Board of Directors, it cannot be termed as Holding company.

We have taken the example of Reliance and JIO. Can JIO be a member of Reliance ? Can Jio Holds share of Reliance ? 

Answer is NO. However we will see exception shortly

Section 19 puts restriction than Holding company cannot transfer shares to Subsidiary Company. If they do such transaction would be void.

So this whole thing than subsidiary cannot hold shares in Holding company have below exception. 

1. When subsidiary company holds shares as Legal Representatives of Deceased member.
2. Subsidiary company can hold as trustee.
3. Subsidiary holds shares even before Holding-Subsidiary relationship came into being. 

 In first two cases Subsidiary company have right to vote, but in third case no such right to Subsidiary company.

Associated Company

It's defined in Section 2(6).

This is also defined in terms of other company. Let's assume Reliance Retail is significantly influenced by Reliance Industries Limited (RIL), but Reliance Retail is not subsidiary of RIL, then we can call Reliance Retail as Associate company.

What is significant influence by the way ?

Section provide clarification for this

1. When other company control at least 20% of share capital
2. Or control business decisions as per some agreement.

In this share capital also included convertible other securities.

Classification Based on Access to Capital

Listed Companies

They are there on BSE/NSE or some stock exchanges.

Section 2(52) defines what is listed company, which states any securities listed on any of the recognized stock exchange.

What is the meaning of securities in above definition? This is actually defined in clause 2(h) of Security Regulation Act, 1956.

Unlisted Companies.

Simple.!! Companies other than listed companies.

Other types of Companies.

Government Companies

These are companies which are typically owned by government. 51% of share capital is owned by either Central Government/State Government or combination of different governments.

For example SBI, BHEL etc.

Foreign Company 

These are companies established or incorporated outside India. But they have business activity in India.

 For example Hindustan Unilever Limited. It's British Dutch Company. Only Name is Indian. :)

Section 8 Companies

These are companies that are formed with charitable objects. 

8(a) describes in what field these objectives could be. Below is the list

1. Commerce
2. Art
3. Science
4. Sport
5. Education
6. Research
7. Social Welfare
8. Religion
9. Charity
10. Protection of Environment

How these companies are different from other companies ?

1. They do not pay dividends to it's members or shareholder
2. They will use all profits to it's objective

Central government have power to issue license to such companies to persons or association of persons. However recently Central government have delegated power to Registrar of Companies.

Such license can be revoked in below circumstance

1. When company contravenes the provision of this act
2. When affairs of company conducted fraudulently
3. Company violates object of company

 Before license is revoked, notice must be sent and company have to give proper explanation.

What will happen after license is revoked ?

Central Government may merge such companies with other companies. Central Government may wind up the companies.

If company contravenes the provision, there can be fine from 10 Lakh Rupees to 1 Crore Rupees. Even director or officers can be imprisonment for up to 3 years and with the fine ranging from 25000 to 2500000 Rs.

These companies can be converted to other class of companies, for that they have to pass a special resolution at general meeting.

Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industries (CII) are some of the examples of such kind of companies

Dormant Company

It's company which don't have much active transaction. Not much money transfers or other accounting activities.

This company is incorporated for following things

• Future projects
• For patents or intellectual properties
• Holding assets

For dormant company, there should be no significant transactions. What does significant transaction mean ?

Company can make below transaction, but no transactions related to buying/selling/security transaction or any other matters. Allowed transactions are

• Payment of fees by company to registrar
• Payment made to fulfill legal duties
• Allotment of shares for fulfillment of law
• Payment for maintenance of it's office and it's record.

Nidhi Companies

These companies are formed with below objects.

• Cultivate the habit cost cutting
• Saving among it's members
• Receiving deposits from members and lending to members
• Mutual benefits

For example, Teacher's society, Employee Society etc.

Public Financial Institution

Section 2(72) lists down some companies as Public Financial Institution. They are

1. LIC instituted under LIC Act, section 3 (Life Insurance Corporation). This is very rich company. Very very rich
2. Infrastructure Development Finance Company Ltd
3. Specified Company referred in Unit Trust Act 2002
4. Institution notified by Central Government under Section 4(A) of Old Company Act, which is repealed by Section 465 of new Company Act
5. Other institution notified by Central government with consultation of Reserve Bank of India

As far as point 5 is concerned such institution must be

• Constituted by State or Central Act
• At least 51% share capital held or controlled by Government

Conclusion

We have seen enough types of Companies. Each types of companies are suitable for different different business. 2013 Act introduced some new forms like Associated Companies.

Legalfudaa