Types and Classification of Companies Under Companies Act

This blog explores the several types of companies classified under the Companies Act, 2013, their distinct features, and suitability for businesses. The objective is to help you make an informed decision as to what you must opt for during the legal incorporation process. For detailed insights, we have also discussed the factors affecting classification of companies, and the basis of such classification as well. Having Questions? Ask us in the comments, or talk to our advisors now!

BRIEF SUMMARY

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.

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
1.	Size	Small Company Non-Small Company
2.	Ownership & Management	Private Company Public Company One Person Company
3.	Intended Business Activity	Profit-Making Company Non-Profit Company Finance & NBFC Companies
4.	Country of Origin	Domestic Company Foreign Company
5.	Liability of Shareholders	Limited Company Unlimited Company

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:
1. Paid-up share capital must not exceed INR 4 crores.
2. Turnover in the previous financial year must not exceed INR 40 crores.
3. Must not be incorporated or operational as a Public Company, Section 8 Company, Holding Company, Subsidiary Company, or any other company notified under the Companies Act.
A small company enjoys streamlined compliance benefits under the Companies Act of 2013, offering a more flexible operational framework. With the privilege of conducting two board meetings annually instead of four, a small company experiences a lighter administrative burden. Additionally, the alleviation of mandatory cash flow declaration at year-end provides financial flexibility. Notably, the Director’s Remuneration Statement becomes signable by either the Company Secretary or Director, simplifying the approval process. Furthermore, small companies are exempt from the mandatory rotation of auditors under Section 139(2), and detailed information in the Auditor’s Report is not required. While Sections 92(5), 117(2), and 137(3) compliance is obligatory, small companies benefit from a more lenient regulatory approach.
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:
1. Restricts the right to transfer its shares.
2. Has a minimum 2 and maximum 200 members (excluding employees and ex-employees who are also shareholders).
3. Prohibits any invitation to the public to subscribe to its shares or debentures.
4. Provides limited liability benefits to the owners.
Public Company: A Public Company, defined under Section 2(71) of the Companies Act 2013, is characterized by:
1. No restrictions on the transferability of its shares.
2. Having a minimum of seven members (with no upper limit on the number of members).
3. Being allowed to raise capital by issuing shares or debentures to the public.
4. Public limited companies have the advantage of raising funds through public offerings but are subject to more extensive compliance requirements and regulatory scrutiny.
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.
1. 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.
2. 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.

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.

Conclusion

FAQs

Q1: What is a "Small Company" under the Companies Act 2013?

A small company, as per Section 2(85) of the Companies Act 2013, must fulfill specific criteria such as having a paid-up share capital not exceeding INR 4 crores, a turnover in the previous financial year not exceeding INR 40 crores, and no holding or subsidiary company or any body corporate holding an interest in its share capital.

Q2: What distinguishes a "Private Company" from a "Public Company" ?

A private company, defined under Section 2(68), restricts the right to transfer its shares and has a minimum of 2 members with an upper limit of 200. In contrast, a public company, as per Section 2(71), has no restrictions on the transferability of its shares, requires a minimum of seven members, and can raise capital by issuing shares or debentures to the public.

Q3: What is the difference between "Limited Company" and "Unlimited Company"?

In a limited company, the liability of shareholders is restricted, and it can be further classified into companies limited by shares (liability limited to the unpaid amount on shares) and companies limited by guarantee (no share capital). Conversely, in an unlimited company, shareholders have unlimited liability and are personally liable for the company’s debts and obligations.

Q4: How is a "Domestic Company" different from a "Foreign Company"?

A domestic company is incorporated and registered in India, operating within the country’s jurisdiction and subject to the regulations of the Companies Act 2013. On the other hand, a foreign company, as per Section 2(42), is incorporated outside India but has a place of business in India, necessitating compliance with specific registration, reporting, and obligations.

Q5: What is a One Person Company (OPC) under the Companies Act?

An OPC is a type of private limited company that can be incorporated with only one shareholder, obtaining a separate legal identity and providing limited liability to the sole owner. This structure combines the benefits of a private limited company with the ease and flexibility of operating a sole proprietorship business.

Types and Classification of Company Under Companies Act, 2013