Define Company
In the modern business environment, large-scale economic activities cannot be carried on efficiently by individuals alone. To overcome limitations such as lack of capital, unlimited liability, and restricted continuity, the concept of a company emerged and types of companies. A company is one of the most significant creations of law, enabling people to combine resources, skills, and efforts for a common commercial objective. Under Company Law, a company enjoys a distinct legal identity and functions independently of its members.
The Companies Act, 2013 governs the formation, functioning, management, and winding up of companies in India. Understanding the definition of a company and its various types is essential for students of law, commerce, and management, as well as for entrepreneurs and professionals.
Definition of Company
According to Section 2(20) of the Companies Act, 2013,
“A company means a company incorporated under this Act or under any previous company law.”
From this definition, it is clear that incorporation is the foundation of a company. Once incorporated, a company becomes a separate legal entity, distinct from its shareholders and directors.
Essential Characteristics of a Company
- Separate Legal Entity
A company has an independent legal existence. It can own property, enter into contracts, and sue or be sued in its own name. The landmark case Salomon v. Salomon & Co. Ltd. established this principle. - Limited Liability
Members’ liability is limited to the unpaid value of shares or the amount guaranteed by them. - Perpetual Succession
The company continues to exist irrespective of changes in membership, death, or insolvency of shareholders. - Artificial Legal Person
A company is created by law and acts through human agents such as directors. - Common Seal (Optional)
Though not mandatory now, the company may have a common seal as a mark of authenticity.
Types of Companies
Companies can be classified on different bases such as incorporation, liability, number of members, control, and purpose.
Types of Companies Based on Incorporation
(a) Chartered Companies
These companies are incorporated by a Royal Charter issued by the Crown. Such companies are rare today.
Example: East India Company.
(b) Statutory Companies
These companies are created by a special Act of Parliament or State Legislature.
Examples: Life Insurance Corporation of India (LIC), Reserve Bank of India (RBI).
(c) Registered Companies
These companies are incorporated under the Companies Act, 2013 or previous company laws. Most companies in India fall under this category.
Types of Companies Based on Liability
(a) Company Limited by Shares
Here, the liability of members is limited to the unpaid amount on shares held by them.
Example: Most private and public companies.
(b) Company Limited by Guarantee
Members agree to pay a fixed amount in case of winding up. These companies are usually non-profit in nature.
Example: Clubs, associations, and charitable organizations.
(c) Unlimited Company
Members have unlimited liability for the company’s debts. Such companies are rare in practice.
Types of Companies Based on Number of Members
(a) Private Limited Company
Defined under Section 2(68) of the Companies Act, 2013.
Key features:
- Minimum 2 members and maximum 200 members
- Restriction on transfer of shares
- Prohibition on public invitation to subscribe to shares
Private companies are preferred by small and family-run businesses.
(b) Public Limited Company
Defined under Section 2(71) of the Act.
Key features:
- Minimum 7 members
- No maximum limit on members
- Shares freely transferable
- Can invite the public to subscribe to shares
Public companies play a major role in capital markets and economic development.
(c) One Person Company (OPC)
Introduced by the Companies Act, 2013 under Section 2(62).
It allows a single individual to form a company with limited liability.
OPC encourages entrepreneurship and formalization of small businesses.
Types of Companies Based on Control
(a) Holding Company
A company that controls another company by holding the majority of shares or controlling the board of directors.
(b) Subsidiary Company
A company controlled by another company, known as the holding company.
(c) Associate Company
A company in which another company has significant influence but not full control (usually 20% shareholding).
Types of Companies Based on Ownership
(a) Government Company
Defined under Section 2(45) of the Companies Act, 2013.
A company in which not less than 51% of the paid-up share capital is held by the Central or State Government.
Example: BHEL, ONGC.
(b) Non-Government Company
A company in which government shareholding is less than 51%.
Types of Companies Based on Purpose
(a) Non-Profit Company (Section 8 Company)
These companies are formed to promote commerce, art, science, education, charity, or social welfare. Profits are reinvested, not distributed as dividends.
(b) Producer Company
Introduced to support farmers and producers. These companies focus on agricultural and allied activities.
Mnemonic Section: Easy Way to Remember Types of Companies
Mnemonic Sentence
“Clever Students Read Law Practically Having Success Guaranteed”
Meaning
- C – Chartered Company
- S – Statutory Company
- R – Registered Company
- L – Limited by Shares / Guarantee
- P – Private Company
- H – Holding Company
- S – Subsidiary Company
- G – Government Company
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