Introduction

Company is an association of person who takes their meals together. The term is derived from the
Latin word (“com” meaning “with” or “together”; “panis” that is “bread”) Section 2(20) of Companies
Act, 2013 states that a company means any association of person registered under the present or the
previous companies act. It is called a “body corporate” because the persons composing it are made
into one body by incorporating it according to the law and clothing it with legal personality.
Under common law, a company is defined as a ‘legal person’ or ‘legal entity’ separate from its member
and capable of being surviving beyond the lives of its members. Whereas it is not merely legal, it is
rather a legal device for attainment of any social or economic end and to a large extent publicly and
socially responsible. It is, therefore, a combined political, social, economic and legal institution.

Features and advantages of the corporate form

a) Separate Legal Entity

The outstanding feature of a company is its independent corporate existence. A company before the
law is a person. It is regarded as an entity separate from its members. By incorporation under the Act,
the company is vested with a corporate personality which is distinct from the members who compose
it. No one can say that he is the owner of the company. Now the business belongs to an institution.
Thus a company continues to exist even if the members go on changing from time to time.

In the landmark decision of Salomon v Salomon (1897) AC 22, it was held that a company has
a corporate personality which is distinct from its members or subscribers. A single shareholder may
virtually hold the entire share capital of the company; even in such a case, the company does not lose
its identity. It was declared that the business belonged to the company and not to a single shareholder
or number of shareholders and neither of them is liable to indemnify the company for its debts.
In case of Tata Engineering & Locomotive Co. Ltd. v State of Bihar, the Supreme Court described the
legal status of a company as “An incorporated association” before law is equal to a natural person
and has a legal identification of its own. It has its own-

 Separate seal
 Separate assets from that of its members
 Can sue and be sued exclusively for its own purpose
Its creditors cannot obtain satisfaction from the assets of its member’s liability of the shareholders and
members is limited to the amount invested by them in the company; similarly, creditors have no to the
assets of the corporation. This position of a corporation is similar since the decision of the Salomon
case.
The law recognises the existence of the company quite irrespective of its motives, intention, schemes,
or conduct of the individual shareholders.

b) Perpetual succession
An incorporated company never dies, as it is an entity with perpetual succession. For understanding
this point more clearly let’s assume M, N, and O are the only members of a company, holding all its
shares. Their shares may be transferred to or inherited by P, Q, or R who may, therefore, become the
new members and members of the company as they are now the shareholders of the company. But
the company will remain the same entity, with same name, privileges and immunities, property and
assets.
Hence in the case of Punjab National Bank v Lakshmi Industrial & Trading co ltd. it was held by the
Allahabad High court that perpetual succession means that membership of a company may keep on
changing from time to time, but that does not affect the companies continuity. A company has
a perpetual existence i.e it has no soul to be saved or body to be kicked.
Since a company has no physical existence, it must act through its agents and all such contracts entered
into by its agents should be under the company’s seal.c) Common Seal
A Company becomes a legal entity by perpetual succession and also by a common seal. In fact, a
common seal of a company is a symbol of its incorporation. It is considered as the official signature of
a company. But now by the virtue of 2015 amendment to the Companies Act, a company may or may
not have a common seal. As per section 21 of Companies Act, authentication of documents,
proceedings and contracts on behalf of a company, signed by any key managerial personnel or an
officer of the company duly authorised by the board in this behalf.
According to section 22, a company may, under its common seal can authorise any person generally
or in respect of any specified matters, to act as an attorney to execute other deeds on behalf of the
company, such deeds can be in or outside India. Such signed deeds by its attorney on behalf of the
company binds the company. Provided that in case if a company does not have its common seal as per
the amendment of 2015, the authorisation shall be made by two directors or by director and company
secretary.

d) Limited Liability of Members

A company having its separate legal entity is the owner of its own assets and bound by its liabilities.
Members are neither the owner nor liable for its debts. All the debts of a company are to be paid by
itself rather than by its members. Members liability becomes limited or restricted to the nominal
value of the shares taken by them in a company limited by shares or the amount guaranteed by them
in a company limited by guarantee. Limited liability is a principal advantage of doing business under a
corporate form of organisation.

Exceptions to the principle of limited liability

 Incorporation by furnishing false information

According to section 7(7), (b) of the Act, tribunal may on an application made to it in regards to any
fraudulent or false information being furnished by a company during its incorporation and on being
satisfied with the same, direct that liability of the members of such company shall be unlimited.

 Fraudulent conduct of business

Under section 339(1), during the course of winding up a company if it appears that any business of a
company is carried on with the intent to defraud creditors of the company or any other persons, the
tribunal may on the application of the Official Liquidator or the Company Liquidator or any other
creditor on being satisfied declare that any person who is or has been a director, manager or officer of
the company or any other person knowing part of aforesaid business shall be personally responsible,
without any limitation of liability.

 Unlimited company
When the company is incorporated under section 3(2)(c) of the Act as an unlimited company. Then
as the name clearly suggests that the liability of its members will be unlimited.

 Misleading prospectus
As per section 35(3) companies act, where it is proved that a prospectus is issued with an intention to
defraud or mislead an applicant for securities of a company or any other person for any fraudulent
purpose, then every person who was a director at the time of issuance of such prospectus or has been
named as director in the prospectus shall be personally responsible without any limitation of liability
for all and any of the losses or damages.

 Acceptance of deposit with a fraudulent intention

As per section 75(1), when a company fails to repay the deposit or part thereof or any interest referred
under section 74 within specified time and it is proved that deposit is accepted with the intent to
defraud the depositors or for any fraudulent purpose, every officer of the company who was
responsible acceptance of those deposits shall be liable of all or any of the losses or damages that may
have been incurred by depositors.

e) Transferability of shares
Section 44 companies act of the Act, declares that “the shares or debentures or any other interest of
any member in a company shall be a movable property that can be transferred in the manner provided
in the article of the company.” Thus incorporation of a company allows its member to sell their shares
in an open market and to get back his investment without any hassle of withdrawing money from the
company. This unique feature of incorporation provides liquidity to the investor and stability to the
company because on the other hand in a partnership firm partners can’t sell their share in an open
market except with unanimous consent of all the partners.

f) Capacity to sue and be sued

Being a body corporate company possesses individual capacity being sued and suing others in its own
name. A company’s right to sue arises when some loss is caused to the company i.e. to property or
personality of the company. A company also has a right to sue whenever any defamatory material
published about it that may affect its business.
The criminal complaint can be filed by a company but it must be represented by a natural person. Not
necessarily be represented throughout by the same person but the absence of such representative
may result in dismissal of the complaint. Similarly, any default on the part of the company can be sued
by the victim on the name of the company only.

g) Company, not a citizen

According to Citizenship Act 1955, only a natural person can be a citizen of India, not a juristic person
will be considered as citizen same stated by the Supreme Court in case of The State Trading
Corporation Of India Ltd. vs The Commercial Tax Officer. Even though the company does not get the
citizenship status of a country, it still can get a residential status.

Procedure for Registration and incorporation of a company

Formation procedure
Starting from section 3 of the Companies Act, which states provision regarding the formation of a
company. A public company may be formed by seven or more person, whereas, a private company can
be formulated by two or more people and one person company can be incorporated by one person
only. By subscribing their names to a memorandum company and complying with the procedure for
registration prescribed under the Act company can be formulated according to the provisions of law.
There is an exception for the incorporation of one person company is that its memorandum must
indicate the name of another person with his prior consent, consent should be in writing which is to
be filed with the registrar along with its memorandum at the time of incorporation that should be
done according to the procedure of law.
The person named then shall become a member of the company in case of subscriber’s death or
his incapacity to contract. The named person can withdraw his consent or the at any time can change
the name of the other person according by giving notice in such a manner prescribed by law.
It becomes the duty of the member to indicate the change made to the company via indicating it in
the memorandum or in any other prescribed manner and the company shall imply the same to the
registrar. Such change of name will not be considered as amendments in the memorandum as this
change is not affecting any terms and conditions of the company.

Registration procedure under Companies Act 2013

As per section 7 of companies Act,2013, the incorporation of the company shall be filed with the
Registrar within whose jurisdiction the registered office of the company is to be situated. Required
documents are as follows.

1. Memorandum of association(herein referred to as MOA) and Article of Association (herein

referred to as AOA) which is to be signed by all the subscribers to the memorandum in the
prescribed form.
2. A declaration is to be made in the prescribed manner by an advocate, a chartered
accountant, cost accountant or company secretary who is a part of formation of the
company and also by a person named in the article as director, manager or secretary of the
company that all the requirements of the act and rules for registration of an association are
fulfilled.
3. An affidavit of each of the subscribers to the memorandum and person named as first
directors in the article declaring that they have not indulged in any criminal activity during
promotion, formation or management of the company neither be found guilty of any fraud
or misrepresentation or any breach of duty of any company under present company law or
any previous 5 year company law.
4. The affidavit must also state that all the documents given to the Registrar for registration
of the company are true to his knowledge that contains all the correct information. If any
of such information found wrong, the person shall be liable for action under section 447 of
the Act.
5. Correspondence address of company till its registration must be established.
6. All the particulars(name, address, surname, nationality, etc.) of each subscriber to the MOA
and person mention as first directors in the AOA of the company along with identity proof
and for directors Director Identification Number must be prescribed in case any subscriber
is a company then such details should be prescribed.
7. Particulars relating to the interest of the first directors of the company in other firms or
body corporate along with their consent to as a director must also be provided.
After collecting all the information and documents, the registrar shall register all the documents and
information given to him and issue a certificate in a prescribed form to ratify the company proposed
is incorporated under this act.
Company will also be provided with a distinct identity in the form of Corporate Identification
Number that must also be included in the certificate issued by the Registrar after incorporation is
completed.
Company shall keep all the copies of the documents and information provided during registration at
its registered of till its dissolution.
Section -8 of the companies act, 2013 deals with the formation of charitable companies whose
objectives are charitable in nature. Such companies must be registered under this act as a limited
company.
What are its effects(with respect to section 9)?

All the subscribers to MOA will become members of the company and are capable of performing all
the functions of an incorporated company under this act from the date of its incorporation specified
in the certificate issued as a proof of such incorporation.
Every alteration that is to be made either in MOA or AOA shall be done through special resolution and
after complying with the procedure specified under the act. Such alteration will have no effect without
the approval of the Central Government in writing. Such approval is not required for AOA alterations
or any alteration in regards to the name of the company is deleted therefrom or addition thereto, of
the word.

Difference between the company and partnership firm

Making a distinction between a company and a partnership firm as both are formed by no of members
agreeing to for either of them.

 Companies are incorporated under the companies act whereas partnership firms are
created on a mutual agreement between the partners.
 Companies are governed Indian Companies Act, 2013 whereas for managing and
controlling partnership firms there is Indian Partnership Act, 1932.
 Registration of partnership firms is voluntary unlike of a company which
is obligatory under the Companies Act to be recognized as a separate legal entity before the
law.
 Number of partners required for incorporation of partnership firm is 2 max can be 100 and
for incorporation of company minimum number of members that are required is 2 in case
of private company and maximum can be 200, but in public company it has to be a minimum
of 7 persons that can last to unlimited as no fixed number is specified, also one person
company can be incorporated by one member.
 Company is a separate legal entity whereas the partnership firm isn’t.
 A company has a contractual capacity of suing and being sued in its own name whereas a
partnership firm can’t.

Classification of companies
Following are the grounds for making the classification of companies.

On the basis of incorporation

There are two types of companies which are as follows.

 Statutory Companies
Companies incorporation under a special act of parliament or state legislature not under any of the
companies act and provisions of the same do not apply to such companies. Example are- RBI,
SBI, Employees State Insurance Corporation etc.

 Registered Companies
Companies which are incorporated under section 7 of the companies act 2013 or any other previous
companies law. For example- Tata, Reliance, Infosys etc.

On the basis of the number of members

There are three forms of companies classified on the basis of the number of members required for its
incorporation.

 One person company

Section 2(62) of companies act 2013 defines one person company as a company that is to be
incorporated with one person as a member. Whereas section-3 companies act specifies certain
exceptions that are to be followed for making registration of a one person company. For example-
AVV AD Avenue (OPC) Pvt. Ltd. company, etc.

 Private companies
According to section 2(68), a private company except in the case of one person company limits the
number of its members to two hundred, minimum paid-up capital is as may be prescribed. Such
companies prevent any public invitation to subscribe to any of its securities.

 Public companies
Public companies defined under section 2(71), as not a private company, whose shares are exchanged
in an open trade market. It issues its shares via an initial public offering and the same can be bought
by the general public. A minimum number of members required to form a public company is at
least seven and may extend to unlimited. There is no restriction on the transferability of its shares.

On the basis of control

There are three categories of companies identified on the basis of control is as follows.

 Holding companies
Section 2(46) of the Act states that when one company is having control over the composition of the
board and the company holds the majority of shares in the other company is known as holding the
company of that other company.

 Subsidiary companies
A company whose control and composition is regulated by the other company known to be its holding
company are called subsidiary companies. Its composition of the board of directors are being
controlled by its holding company and more than half of its shares are in possession of that
company. Section 2(87) of the act define a subsidiary company.

 Associate companies
Company in which the other company has significant influence but the company is not a subsidiary of
the company having such influence(control of at least 20% of total share capital) is called an associate
company according to Section 2(6). These type of companies include joint venture company

On the basis of Liability

1. Limited companies
Liability of its members is either limited to the share bought by them or limited to the amount each
member consented to contribute to the assets of the company at it’s winding up.
  Limited by share
Liability of members is limited to the number of shares bought by them in a company limited by share.
A company having the liability of its members limited by the memorandum to the amount, if any, due
on shares held by them respectively is called company limited by shares according to section 2(22)

 Limited by guarantee
Limited by guarantee is one whose members liability is limited by the memorandum. This liability will
be limited to such amount as members respectively undertake to contribute to the assets of the
company in the process of it’s winding up. Liability of the members is limited to the fixed sum specified
in the memorandum agreed by the members to contribute.

2. Unlimited companies
Limited liability is a desirable option by the members but is not a necessary adjunct to incorporation.
According to section 2(92) of the Act, any company not havings limit on the liability of its members is
termed as an unlimited company. These types of companies are rarely formed now. AOA is must for
such companies stating the number of members with which the company is registered and amount
of capital share if it has. Liability of the member is like partners of a firm for all trade debt without any
limit.

On the basis of the manner of access to capital

 Listed company
According to section 2(56), any company whose securities are listed on any recognised stock exchange
for public trading is termed as a listed company.it is also known as a quoted company.

 Unlisted company
These companies are privately owned companies as they are not listed on any stock exchange. Hence
they do not find any opportunity to raise funds.

Doctrine of lifting the corporate veil

It has often been assumed that it is a veil covered on a personality of a company beyond which a court
can’t see, which is not actually true. It can be said that this doctrine is an exception to the natural
person identity of a company.
In Charanjit Lal v Union of India case, the Supreme Court did not allow a shareholder to sue for
the violation of the fundamental rights of a company.
A company before the eyes of law is a legal person but in reality, it is an association of person
incorporated under the Act to be called a company. There are certain exceptions when the curtain of
corporate personality can be lifted by the court. In the question of property and capacity of acts done
and rights acquired or, liability assumed thereby the personality of the company corporators are being
ignored. Whereas, when the members enjoying the benefits on the name of a company or when the
court wishes so can lift such a veil. Specific grounds on which a court can lift the corporate veil are as
follows.

 In case of determining the character of a company- To see whether a company is an

“enemy”. In such cases, the court may in its discretion examine the nature of persons in real
control of the corporate affairs.
 For the benefits of revenue-The court can cancel the registration of a company if it is used
for tax evasion purposes” this statement is held by the Supreme Court in Juggilal Kamlapat
v CIT case under income tax act, agricultural income is exempted from tax.
 In Bacha F Guzdar v CIT [AIR 1955 SC 74] Court observed that the income of a tea company
was exempted upto 60% as agricultural income and 40% is taxed income. Plaintiff is an
employee of such company and demand exemption of 60% in dividend income as to be
regarded as agricultural income. Therefore, it was held by the court that though the income
of the company is partly agricultural, therefore income, when received by the shareholders
as dividends, could not be regarded as agricultural income.
 In case of fraud or improper conduct-The court can refuse to uphold the separate
existence of a company where it is formulated to overcome law, to defraud creditors or to
avoid legal obligations. Simply stating that whenever a company is incorporated with an
intention to defraud its creditors or to avoid legal duties, in such cases the court has the
power to lift the veil of the corporation.
 There can be many other possible grounds on which court can lift the veil of a corporation
to get to know the true picture of working of any company.
Advantages and Disadvantages of Incorporation of a company
The term company, in its general sense, can be defined as a group of persons, associated together to
achieve some common objective. In its legal sense, the term company, as per the Companies Act, 2013,
under section 2(20), is defined as “a company incorporated under the Companies Act 2013 or any
previous company law.”

The term only emphasises on the registration and the formation of the company and does not further
look into its meaning, nature and characteristics. Therefore, the legal meaning to the term company
can be summed up as;

1. Any association, under the Companies Act, 2013 or any previous Companies Act shall be
termed as a company.
2. The misconception that it is a fictitious person is not true. It in reality is an artificial or a legal
person, recognised by law, once it is registered and it owes similar rights and duties that a
natural person has.
3. In V Javali v Mahajan Borewell, it was held that a company can be held liable for a statutory
violation like an individual, but it cannot be imprisoned. Thus, any violation, as stated under
the Companies Act attracts penalty and not imprisonment of the company.

Advantages of Incorporation of a Company

1. Creates a Separate Legal Entity: This states that a company is independent and separate
from its members, and the members cannot be held liable for the acts of the company, even
when a particular member owns majority of shares. This was held in the case of Salomon v
Salomon & Co. Ltd. (1897) AC 22. Salomon transferred his business of boot making, initially
run as a sole proprietorship, to a company (Salomon Ltd.), incorporated with members
comprising of himself and his family. The price for such transfer was paid to Salomon by way
of shares, and debentures having a floating charge (security against debt) on the assets of
the company. Later, when the company’s business failed and it went into liquidation,
Salomon’s right of recovery (secured through floating charge) against the debentures stood
prior to the claims of unsecured creditors, who would, thus, have recovered nothing from
the liquidation proceeds. The claims of certain unsecured creditors in the liquidation process
of Salomon Ltd., where Salomon was the majority shareholder, was sought to be made
personally liable for the company’s debt. Hence, the issue was whether, regardless of the
separate legal identity of a company, a shareholder/controller could be held liable for its
debt, over and above the capital contribution, so as to expose such member to unlimited
personal liability. The House of Lords held that, as the company was duly incorporated, it is
an independent person with its rights and liabilities appropriate to itself, thus, making
Salomon & Co. Ltd liable, and not Salomon.
2. Company has Perpetual Succession: The term perpetual succession means continuous
existence, which means that a company never dies, even if the members cease to exist. The
membership of a company changes from time to time, but that has no effect on the
existence of the company. The company only comes to an end, when it is wound up
according to law, as per the provisions of the Companies Act, 2013. Re Noel Tedman
Holdings Pty Ltd (1967) Qd R 56 stated that a companies members may come and go but
this does not affect the legal personality of the company
 3. Can own Separate Property: Since a company is termed as a separate legal entity in the
eyes of law, it can hold property in its own name and the members cannot claim to be the
owner of the companies property(s). The Supreme Court, in the case of Bacha F. Guzdar v
CIT Bombay stated that a company being a legal person, in which all its property is vested
and by which it is controlled, managed and disposed of a member cannot, ensure the
companies property on its own name. In Macaura v. Northern Assurance Co. Ltd., a
shareholder of a timber company, held all shares of the company but one. He also insured
the timber (asset of the company) on his own name, which was destroyed in fire. When he
sought compensation, it was held that they were not liable to pay any money to the
shareholder, in lieu of the timber since he did not own the timber and that timber, which
the company owned was not insured.
4. Capacity to sue and be sued: The company has the capacity of suing a person or being sued
by another person in its own name. A company, though can be sued or sue in its own name,
it has to be represented by a natural person and any complaint which is not represented by
a natural person is liable to be dismissed in the same way in which an individual complaint
is liable to be dismissed in the absence of the complainant.
5. Easier access to Capital: Raising capital is easier for a corporation, since a corporation can
issue shares of stock. This may make it easier for your business to grow and develop. If the
in the market for a bank loan, that’s another reason to incorporate, since n most cases,
banks prefer and easily lend money to incorporated business ventures.

Disadvantages of Incorporation of a Company

1. Cost – The initial cost of incorporation includes the fee required to file your articles of
incorporation, potential attorney or accountant fees, or the cost of using an incorporation
service to assist you with completion and filing of the paperwork. There are also ongoing
fees for maintaining a corporation.
2. Double Taxation – Some types of corporations such as a C Corporation, have the potential
to result in “double taxation.” Double taxation occurs when a company is taxed once on
profits, and again on the dividends paid to shareholders.
3. Loss of Personal “Ownership” – If a corporation is a stock corporation, one person
doesn’t retain complete control of the entity. The corporation is governed by a board of
directors who are elected by shareholders.
4. Required Structure – When you form a corporation, you are required to follow all of the
rules outlined by the state in which you filed. This includes the management of the
corporation, operational requirements and the corporation’s accounting practices.
5. Ongoing Paperwork – Most corporations are required to file annual reports on the financial
status of the company. The ongoing paperwork also includes tax returns, accounting
records, meeting minutes and any required licenses and permits for conducting business.
6. Difficulty Dissolving – While perpetual existence is a benefit of incorporating, it can also be
a disadvantage because it can require significant time and money to complete the necessary
procedures for dissolution.
7. Lifting of Corporate Veil – From the juristic point of view, a company is a legal person
distinct from its members [Salomon v. Salomon and Co. Ltd. (1897) A.C 22]. This principle
may be referred to as the ‘Veil of incorporation’. The courts, in general, consider themselves
bound by this principle. The effect of this Principle is that there is a fictional veil between
the company and its members. That is, the company has a corporate personality which is
distinct from its members. But, in a number of circumstances, the Court will pierce the
corporate veil or will ignore the corporate veil to reach the person behind the veil or to
reveal the true form and character of the concerned company. The rationale behind this is
probably that the law will not allow the corporate form to be misused or abused. In those
circumstances in which the Court feels that the corporate form is being misused, it will rip
through the corporate veil and expose its true character and nature.
Classification of Companies under the Companies Act, 2013
Introduction
The Indian economy has a variety of companies existing in its market such as public companies, private
companies, investment companies, limited liability companies etc. These numerous entities in the
market may look different from each other on the surface, but based upon certain identifiable common
characteristics they can be grouped into below-mentioned classifications. This article aims to draw
your attention towards the conventional classification of the companies that are made based upon
factors such as liability, control, incorporation, transferability of shares etc.

Classification of Companies
The companies may be classified based upon the mode of their incorporation and incorporation
process which is defined under Section 7 of the Companies Act, 2013.

Incorporation is the day when the company acquires a legal identity i.e. the day when a company takes
birth in the eyes of law. Section 2 of the Companies Act, 2013 defines the various kinds of companies
and their facets.

(I) Classification of Companies on the basis of incorporation

Royal Charter Company

It may be better understood as the company born out of the authorization of the sovereign or the
crown. This was the mode of incorporation which was followed earlier to the Registration under the
Companies Act. A charter is granted by the crown to the people requesting to form a cooperative or a
company. To name a few, The Bank of England (1694), The East India Company (1600) were formed by
the means of charters passed by the then Crown of England. The authorization given by the sovereign
gives legal existence to these companies by means of the body of the charter. This mode of
incorporation is no more recognised in any Companies Act to incorporate new Companies.

Statutory Company

As the name suggests, these are the companies that are formed by the means of a special statute
passed by the Parliament or the State Legislature. The examples of statutory companies in India are the
Reserve bank of India, the Life Insurance Corporation of India Act, etc.

The Statutory origins of these companies provide power to such companies to be bound by their own
statute, i.e. whenever there is any dispute between statute under which these companies were formed
and the Companies Act 2013, the statute being special legislation persists over the general law of
Companies Act. The parliaments both State and Centre are empowered to make such legislation for
incorporation under the power endowed to them by the Constitution of India.
Registered Company

As defined under Section 2(20) of the Companies Act, 2013, registered companies are the companies
which get registered under the statute of the Companies Act. Companies are also provided with a
certificate of incorporation by the Registrar of the Company.

(II) Classification of Companies on the basis of liability of members

The liability upon the members is also used to classify the companies, it describes the limit to which
member will be liable if such liability were to befall upon the company. On the basis of liability of the
members, the companies may be classified into:

Companies limited by shares:

These types of companies are mentioned in Section 2(22) of the Companies Act, 2013. The liability of
the members of such a company is based upon the number of shares kept unpaid. This liability against
the shares kept may be brought to the authority. Once the payment towards the security is made by
the shareholder or member then no liability beyond that is placed upon such member. The liability
may be enforced during the company’s existence and even during its winding-up process.

Companies limited by guarantee

These types of companies are mentioned in Section 2(21) of the Companies Act, 2013. In a Company
where the liability is limited by guarantee, it means the member of the Company has agreed on the
Memorandum of Association to repay the same amount during winding up of such Company. In such
companies, the liability of the members is limited to the undertaking given by them. Trust research
associations, etc. are examples of companies liability limited by guarantee.

Unlimited Liability Company

These companies as defined under Section 2(92) of the Companies Act, 2013 do not have a cap on the
amount of liability that may add on their members in case the company has to repay any debt. For any
amount that the company owes these members, the unlimited liability company shall be liable to the
extent of their interest in the company. These companies do not draw any popularity when it comes
to Indian Market.

Difference between limited and unlimited companies

Limited liability company Unlimited liability company

Liability of the members is only in proportion to Liability of the members is not in proportion to the
the sum they have invested in the company. investment in their company.

Personal properties or assets will not be forfeited Even the personal property of the member will be
if the company goes bankrupt or winds up. forfeited against the liability of the company.
(III) Classification of Company on the basis of the number of members

The number of members in a company is looked upon while classifying them. This classification of the
company has been discussed in detail under the below-mentioned headings. On the basis of the
number of members in the companies may be classified into:

Private Company

The private companies as defined under Section 3(1)(b) of the Companies Act, 2013 are very restrictive
in nature wherein it may in its Articles of Association restrict the right to transfer shares. The number
of members in such a company might be a maximum of 50. The shares and debentures of such
companies are not available for the public at large. The number of members in a company to be called
a private company is two, wherein it is clearly set that two members jointly holding a single share shall
be considered as one member and not two members. The easy identification of Private companies is
the ‘Pvt. Ltd.’ attached to its name.

Public Company

As defined under Section 2(71) of the Companies Act, 2013, Public Companies are the ones which are
not a private company. As mandated under Section 3(1)(a) of the Companies Act, 2013, there should
be at least 7 members to form a public company. It is the intrinsic nature of the public company that
there is the right to transfer shares and debentures of the public company to the public at large.

(IV) Classification of Companies on the basis of domicile

On the basis of their domicile the companies may be classified into:

Foreign Company

A Company which is situated outside India, but has a registered place in India may be physical or
electronic address or perhaps company has ownership itself or through the agents, representatives or
managers of the company is known as a foreign company under Section 2 (42) of the Companies Act,
2013. The aforementioned definition included in the new Companies Act has widened the scope of the
definition of foreign companies extending the same to the entities having their electronic presence in
India. The list of foreign companies listed in India has names of the corporate giants such as Whirlpool
of India Ltd., Timex Group India Ltd., Ambuja Cements Ltd., etc.

Indian Company

Indian Company has been defined under Section 2(20) of the Companies Act, 2013 as any company
registered under the Companies Act, 2013, or any other previous law is known as an Indian Company.
An Indian company may prove its locus standi with the help of its office address and the legislation
provides a guideline to be followed while using such powers by an Indian company.

(V) Classification of companies on the basis of Miscellaneous factors

On the basis of other miscellaneous factors the companies may be classified into:

Government Company

As defined under Section 2(45) of the Companies Act, 2013, any company in which a minimum of 51
per cent of the paid-up share capital is held by the Central/State Government, and/or held fractionally
by the Central Government and partly by one or more State Governments is known as a Government
Company. The major drawback of having a government company is the lack of autonomy.

Holding, Subsidiary Companies and Associated Companies

Under Section 2(46) of the Companies Act, 2013, a company is known as the holding company of
another company if it has administrative control over another company. Such control may be regarding
the affairs of the company. Under Section 2(87) of the Companies Act, 2013, a company is known as
a subsidiary company of another company when control is exercised by the other company over the
subsidiary company.

A company is deemed to be a subsidiary company of another:

(1) If the other company

 Exercises or controls more than 50% of the total voting power i.e. where the holders of
preference shares have the same voting rights as the equity shares holder, or,
 50% in nominal value of its equity share capital held, or,
 Possesses power regarding the composition of the Board of directors.
(2) If it is a subsidiary of a company which is a subsidiary of the controlling company.

The holding power also includes another kind of Company known as Associate Company, which is now
being explained with respect to the above-mentioned Holding and subsidiary company.

Associate Company

These Companies as defined under Section 2(6) of the Companies Act, 2013 are the one in which the
other company has significant influence but these Companies are not the subsidiaries of such
influencing companies known as the Associate Company. The Joint Venture Companies are such
associate companies.

The significant control can be inferred directly from the explanation attached to the provision which
requires the influencing company to hold 20% of the share capital or any agreement whereby the
decision making of the associate is placed upon such Influencing Company. The Associate Company
concept has been seen as a harbinger of transparency in the working of the Company since it provides
a more rationale grundnorm for an associated relationship between the two companies.

One man Company

Under Section 2(62) of the Companies Act, a company in which one person is the whole and sole owner
of the share capital of the company is known as a One Man Company. In order to meet the statutory
requirement of a minimum number of members, some namesake company shareholders hold one or
two shares each. The namesake shareholder members are usually nominated by the principal
shareholder. The principal shareholder enjoys all the profits of the business with the protective shield
of limited liability. Such companies have been given legal sanctity.

Difference between One person company and Sole Proprietorship

The major or fundamental difference between a one-person company and the sole proprietorship is
based upon the limitations or extent of liability in the one-person company. One person company is
different from the Sole proprietorship as the ne person company differentiates the promoter from the
separate entity of the company. The liability of the director of the one-man company is limited in the
event of any legal liability or claims made against the company.

Investment Company

The Investment Companies as defined under section 186 of the Companies Act, 2013, are the
companies which have a fundamental business or transaction relating to the securities of other
companies. Securities may be of a nature of shares or debenture or other securities offered by such
entity. The word investment in its predominant sense means to acquire a resource and hold it for the
interest earned over it, but in the case of an investment company, the investment is aimed not only at
the acquisition and holding but perhaps to even the sale of the securities whenever they reach a better
price.

The Investment company under Section 186 of the Companies Act, 2013 are based upon the market
trend relating to the shares analyses the maximum profit investment for the Company. The commonly
used terminology of stock market relating to the bear and bull market and the understanding of the
trend plays a crucial role to attain profits aimed at by the company.

There are still two perspectives towards the investment company functioning and the characteristics
of the transactions made by such company. One set of claims suggests that the Investment Companies
are only supposed to purchase security and earn interest by maintaining them. The other school of
thought suggests that the investment company may earn not only by purchase and hold but also selling
of the securities.

New kind of Companies recognised under the Act, 2013

Dormant Companies

Where a company is formed under Section 455 of the Company Act, 2013 for a future endeavour or to
hold an asset which may be a physical or intellectual property and has no significant accounting
transaction, such a company or inactive company can make an application to the Registrar in the
prescribed manner for obtaining the status of the dormant company.

The explanation attached to this provision states about the inactive company prescribing a period of 2
years of inactivity in terms of business transactions, operations etc, or the companies which have not
filed their annual returns or the financial statement in the last 2 years. Such transactions do not include
all the necessary payment which are made by the company to the Registrar and other payments which
are supposed to be made under any other law.
The Registrar allows the certificate of the inactive company to the applicant company. The registrar
must maintain the list of dormant companies. A company to remain a dormant company on the books
of the registrar has to pay the required sum. The Company on request may make the Dormant
Company back to an active company.