Company forms of businesses have become immensely popular over the years. Their development has led to the creation of so many new types of companies. Companies are to be classified on the basis of liabilities, members and on the basis of control.
Types of Companies
- Companies Limited by Shares
- Companies Limited by Guarantee
- Unlimited Companies
- One Person Companies (OPC)
- Private Companies
- Public Companies
- Holding and Subsidiary Companies
- Associate Companies
- Companies in terms of Access to Capital
- Government Companies
- Foreign Companies
- Charitable Companies
- Dormant Companies
- Nidhi Companies
- Public Financial Institutions
We can classify all these companies in various categories.
Classification of Different Types of Companies
Companies on the Basis of Liabilities
When we look at the liabilities of members, companies can be limited by shares, limited by guarantee or simply unlimited.
a) Companies Limited by Shares
Sometimes, shareholders of some companies might not pay the entire value of their shares in one go. In these companies, the liabilities of members is limited to the extent of the amount not paid by them on their shares.
This means that in case of winding up, members will be liable only until they pay the remaining amount of their shares.
Learn more about Multinational Companies here in detail.
b) Companies Limited by Guarantee
In some companies, the memorandum of association mentions amounts of money that some members guarantee to pay.
In case of winding up, they will be liable only to pay only the amount so guaranteed. The company or its creditors cannot compel them to pay any more money.
c) Unlimited Companies
Unlimited companies have no limits on their members’ liabilities. Hence, the company can use all personal assets of shareholders to meet its debts while winding up. Their liabilities will extend to the company’s entire debt.
Learn more about Small Scale Industries here in detail.
Companies on the basis of members
a) One Person Companies (OPC)
These kinds of companies have only one member as their sole shareholder. They are separate from sole proprietorships because OPCs are legal entities distinct from their sole members. Unlike other companies, OPCs don’t need to have any minimum share capital.
b) Private Companies
Private companies are those whose articles of association restrict free transferability of shares. In terms of members, private companies need to have a minimum of 2 and a maximum of 200. These members include present and former employees who also hold shares.
c) Public Companies
In contrast to private companies, public companies allow their members to freely transfer their shares to others. Secondly, they need to have a minimum of 7 members, but the maximum number of members they can have is unlimited.
Companies on the basis of Control or Holding
In terms of control, there are two types of companies.
a) Holding and Subsidiary Companies
In some cases, a company’s shares might be held fully or partly by another company. Here, the company owning these shares becomes the holding or parent company. Likewise, the company whose shares the parent company owns becomes its subsidiary company.
Holding companies exercise control over their subsidiaries by dictating the composition of their board of directors. Furthermore, parent companies also exercise control by owning more than 50% of their subsidiary companies’ shares.
b) Associate Companies
Associate companies are those in which other companies have significant influence. This “significant influence” amounts to ownership of at least 20% shares of the associate company.
The other company’s control can exist in terms of the associate company’s business decisions under an agreement. Associate companies can also exist under joint venture agreements.
Companies in terms of Access to Capital
When we consider the access a company has to capital, companies may be either listed or unlisted.
Listed companies have their securities listed on stock exchanges. This means people can freely buy their securities. Hence, only public companies can be listed, and not private companies.
Unlisted companies, on the other hand, do not list their securities on stock exchanges. Both, public, as well as private companies, can come under this category.
Other Types of Companies
a) Government Companies
Government companies are those in which more than 50% of share capital is held by either the central government, or by one or more state government, or jointly by the central government and one or more state government.
b) Foreign Companies
Foreign companies are incorporated outside India. They also conduct business in India using a place of business either by themselves or with some other company.
c) Charitable Companies (Section 8)
Certain companies have charitable purposes as their objectives. These companies are called Section 8 companies because they are registered under Section 8 of Companies Act, 2013.
Charitable companies have the promotion of arts, science, culture, religion, education, sports, trade, commerce, etc. as their objectives. Since they do not earn profits, they also do not pay any dividend to their members.
d) Dormant Companies
These companies are generally formed for future projects. They do not have significant accounting transactions and do not have to carry out all compliances of regular companies.
e) Nidhi Companies
A Nidhi company functions to promote the habits of thrift and saving amongst its members. It receives deposits from members and uses them for their own benefits.
f) Public Financial Institutions
Life Insurance Corporation, Unit Trust of India and other such companies are treated as public financial institutions. They are essentially government companies that conduct functions of public financing.
Solved example of Types of Companies
Question: Consider these features and state what types of companies they are attributable to.
i) Shares are freely transferable
ii) Only one member exists
iii) The government owns 75% shares
iv) Shares are not listed on stock exchanges
v) No profit motives
vi) 35% shares held by another company
i) Public companies
ii) One person companies
iii) Government companies
iv) Private or even public companies
v) Section 8 company
vi) Associate company