A company is one of the most popular and common business structures opted by entrepreneurs in India and all over the world. It allows individual and non-individual entities to come together, pool their resources, and conduct business operations to achieve common goals and objectives. In India, companies are regulated under the umbrella law- the Companies Act of 2013, which provides a legal framework for the formation of various types of Companies, their incorporation, management, compliances, closures, and so on. The goal is to regulate all aspects of companies, ensuring their transparency, accountability, and fair trade practices in the country.
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The purpose of this blog is to explore some of the common types and classification of companies under the Companies Act and understand the general features applicable to each one of them. Understanding these types and their characteristics is essential for entrepreneurs, business owners, and investors to help them choose the most suitable structure for their ventures and lead it to the path of immense growth and success.
Factors Affecting Company Classification under the Companies Act
Company Classification under the Companies Act is based on several factors. These factors help to differentiate companies based on their size, ownership structure, operations, and legal requirements. Understanding these factors is crucial as it provides clarity on the obligations and benefits associated with each classification. Let’s explore the key factors that influence the classification of companies:
- Size of the Company: The size of a company, often measured by its turnover, capital investment, or number of employees, plays a significant role in its classification. The Companies Act typically defines thresholds or criteria for categorizing companies as small and large. The classification based on size determines the extent of regulatory requirements and compliance obligations imposed on the company.
- Ownership & Management Structure: The ownership structure of a company is another vital factor that affects its classification. Companies can be classified as Private Limited Companies, Public Limited Companies, or One Person Companies. Each classification has its own set of rules governing ownership, shareholder rights, and decision-making processes.
- Intended Business Activity: The nature of business activity undertaken by a company also influences its classification. Companies engaged in specific sectors such as banking, insurance, or other financial services can be classified as banking and non-banking financial activities. On the other hand, we have companies that perform non-profit activities as well. The Companies Act sets different regulatory frameworks for these types of companies.
- Country of Origin: Companies that operate in India but are incorporated beyond its territorial borders are called foreign companies and are subject to different laws and regulations under the Companies Act. Foreign companies are typically required to fulfill stricter registration, reporting, and compliance requirements to operate legally within India.
- Liability of Owners: The extent of liability assumed by the company’s owners or shareholders is an important factor for the classification of companies too. Companies can be classified as limited liability or unlimited liability based on the personal liability of their owners.
Different Company Types & Classification Under the Companies Act
Company Classification under the Companies Act, 2013 is based on the various factors discussed above, such as size, ownership structure, business activity, liability, and geographical scope. Let’s explore each classification and its specific types thoroughly.
| S.No | Basis of Classification | Types and Classification of Companies |
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1. |
Size |
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2. |
Ownership & Management |
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3. |
Intended Business Activity |
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4. |
Country of Origin |
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5. |
Liability of Shareholders |
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Company Types Based on Size:
- Small Company: A small company is defined under Section 2(85) of the Companies Act 2013. It meets the following criteria:
- Paid-up share capital does not exceed INR 2 crores or the prescribed amount.
- Turnover in the previous financial year does not exceed INR 20 crores or the prescribed amount.
- No holding or subsidiary company or any body corporate holds an interest in its share capital.
- Non-Small Company: Non-small companies are those that do not meet the criteria to be classified as small companies. They are subject to regular compliance requirements and financial reporting obligations as prescribed by the Companies Act
Company Types Based on Ownership & Management:
- Private Company: A private company, defined under Section 2(68) of the Companies Act 2013, has the following characteristics:
- Restricts the right to transfer its shares.
- Has minimum 2 members with an upper limit of 200 (excluding employees and ex-employees who are also shareholders).
- Prohibits any invitation to the public to subscribe to its shares or debentures.
- Public Company: A public company, defined under Section 2(71) of the Companies Act 2013, is characterized by:
- No restrictions on the transferability of its shares.
- Having a minimum of seven members (with no upper limit on the number of members).
- Being allowed to raise capital by issuing shares or debentures to the public.
- One Person Company (OPC): Introduced by the Companies Act 2013, OPC is a type of private limited company that can be incorporated with only one shareholder. It provides a separate legal identity and limited liability to the sole owner, combining the benefits of a private limited company with the ease of operations for single entrepreneurs.
Company Types Based on Business Activity:
- Financial & NBFC Company: Financial & NBFC companies operate in the financial sector and provide financial services such as deposits, insurance, credit and so on. These companies are regulated by specific legislation such as the Reserve Bank of India Act, Insurance Act, or relevant financial regulatory authorities. Financial companies play a crucial role in the economy by providing financial services, managing risk, and facilitating economic growth.
- Profit-Earning Company: Profit-earning companies are formed with the primary objective of generating profits for their shareholders or owners. These companies engage in various business activities, such as manufacturing, trading, services, or technology. They operate with the intention of earning revenues that exceed their expenses and ultimately aim to distribute profits among the shareholders or reinvest in business growth. Profit-earning companies are subject to the general provisions and regulations outlined in the Companies Act 2013, including compliance requirements, financial reporting, and corporate governance obligations.
- Non-Profit Company: Non-profit companies are formed for promoting art, science, commerce, religion, charity, sports, education, research, or any other social objective. These companies are registered under Section 8 of the Companies Act 2013 and must apply their profits solely for promoting their objectives. Non-profit companies differ from profit-earning companies as they prioritize social welfare and do not distribute profits among their members. Instead, any surplus generated is utilized for the company’s social objectives. Non-profit companies enjoy certain exemptions under the Companies Act, but are subject to strict regulations related to the utilization of funds and compliance with the company’s objectives.
Types of Companies Based on Country of Origin:
- Domestic Company: A domestic company is incorporated and registered in India and operates within the country’s jurisdiction. It is subject to the regulations and compliance requirements of the Companies Act 2013.
- Foreign Company: A foreign company, as per Section 2(42) of the Companies Act 2013, refers to any company incorporated outside India but having a place of business in India. Foreign companies operating in India are required to comply with specific registration, reporting, and compliance obligations under the Companies Act.
Company Types Based on Liability of Shareholders:
- Limited Company: Limited companies are companies which restrict the liabilities of their shareholders. It can be further classified into companies limited by shares and companies limited by guarantee.
- Limited by Shares: These companies’ liability is limited to the extent of the unpaid amount on the shares held by the shareholders. Most private and public limited companies fall under this category.
- Limited by Guarantee: These companies do not have share capital. The liability of its members is limited to the amount they guarantee to pay in case the company is wound up.
- Unlimited Company: In an unlimited company, the liability of the members is not limited. The members are personally liable for paying-off the company’s debts and obligations. Unlimited companies are relatively uncommon and are often formed for specific purposes or in niche sectors.
Conclusion
Understanding Company Classification under the Companies Act 2013 in India is essential for entrepreneurs, investors, and professionals. The factors influencing Company classification, such as size, ownership structure, business activity, liability, and geographical scope, provide insights into the diverse landscape of companies. By selecting the appropriate company type and complying with the associated regulations, stakeholders can lay a strong foundation for success in the corporate world. It is crucial to seek professional advice and stay updated with the Companies Act to ensure compliance and make informed decisions. By leveraging the benefits and fulfilling the obligations of each company type, entrepreneurs can contribute to a vibrant and sustainable business ecosystem in India.