Classification of Companies
Classification of Companies
The Companies Act, 2013, classifies companies based on various features. This article provides a summary of various types of classification of company.
Companies are primarily classified into private and public. Private companies or private limited companies are those companies that are closely-held and have less than 200 shareholders. Public companies are limited companies that have more than 200 shareholders and are listed on a stock exchange.
The 2013 Act has brought with it a new form of a company entitled One Person Company (OPC), which in theory is a private company. As can be deciphered from the name, a One Person Company requires only one member to form it. The person forming an OPC must be a natural person, a citizen of India and an Indian resident during the time of formation. A minor can never be a member or a nominee of a member in OPC. OPC provides an opportunity for the sole proprietors to reap the benefits of limited liability by becoming a corporate entity.
Classification on the Basis of Control
Companies, on the basis of control, are classified as follows:
- Holding company.
- Associate company.
The relationship of holding or subsidiary companies is established either with the control of Board of Directors or control of share capital. A company will be a holding company of another in the following scenarios:
- Controls the composition of the Board of Directors of the other company.
- Exercises or controls more than 50% of the total share capital either on its own or together with one or more of its subsidiary companies.
If a company has significant influence over another company, the latter will be the Associated Company of the first company. Significant influence is derived either from control of at-least 20% of the total share capital, or of business decisions under an agreement.
Classification on the Basis of Liability
Companies, on the basis of liability, are classified into the following:
Company Limited by Shares
This is the most widespread form of a company. Companies usually have limited liability of members unless specified otherwise in the memorandum (MOA) and articles of association (AOA). In this case, the liability of the members is limited to the extent of face value of shares and premium payable on shares. A limited company can either be a private or public company.
Company Limited by Guarantee
A company limited by guarantee refers to a company having the liability of its members limited by the memorandum to an amount the members may respectively undertake to contribute to the assets of the company in the event of it being wound up.
Unlimited Liability Company
Unlimited Company is a kind of a company which doesn’t have any limit on the liability of its members. The liability of the member’s will not cease until the final payment. Such a company may or may not have a share capital of its own.
Classification on the Basis of Access to Capital
Companies, on the basis of access to capital, are classified as follows.
When the securities of a private or public company aren’t listed on any of the stock exchanges, it is an unlisted company. Such companies cannot raise funds from the public at large by issuing a prospectus. However, an unlisted company may issue shares on Private Placement basis or to raise private equity funding.
A listed company is a kind of a company whose securities are listed on at-least one of the stock exchanges. Such a company must comply with the provisions of listing.
Classification on the Basis of Size
Companies were earlier not classified on the basis of size, but the introduction of “Small Company” back in 2013 prompted the need for this kind of classification. Any company other than a small company is either a mid-size or a large company.
Companies, whose paid-up share capital does not exceed fifty lakh rupees or any prescribed amount not exceeding 5 crore rupees, and its turnover as per its latest profit and loss account is limited to 2 crore rupees or any prescribed amount not exceeding 20 crore rupees, will be considered as a small company. A public company can never be a small company. Likewise, a holding or subsidiary company will not be a small company.
Classification on the Basis of Objects
This classification is based on the objective of a firm, which could be profit-oriented or otherwise.
Not for Profit Company
A company whose sole objective is to promote commerce, art, science, sports education, research, social welfare, religion, charity, protection of environment or any other useful purpose and not having any profit motive will be termed as a not-for-profit company. Such a company must apply its profits or other incomes in promoting its objects. It mustn’t make any payment of dividend to its members. Section 8 Company is the only type of company that is a not-for-profit company.
Nidhi companies have been in existence right from the days of yore. Their primary objective is to support the habit of thrift. It was promoted by public spirited men drawn from affluent local persons, lawyers and professionals etc. Please visit this link for details on registering a Nidhi company
Classification on the basis of Holding of Shares
Companies, on the basis of holding of shares, are classified into the following.
A Government company is a kind of a company in which not less than 51% of the paid-up share capital is held by the Central or State Government, or partly by the Central and State Governments, and includes any company which is a subsidiary of a Government company.
A foreign company is any company or body corporate incorporated outside India which has a place of business in India, and conducts any business activity in India.