Classification of Companies

Author: Nayantara Narayan

Industrial has revolution led to the emergence of large-scale business organizations. These organizations require big investments and the risk involved is very high. Limited resources and unlimited liability of partners are two important limitations of partnerships of partnerships in undertaking big business. Joint Stock Company form of business organization has become extremely popular as it provides a solution to overcome the limitations of partnership business. The Multinational companies like Coca-Cola and, General Motors have their investors and customers spread throughout the world. The giant Indian Companies may include the names like Reliance, Talco Bajaj Auto, Infosys Technologies, Coromandel International Ltd., Hindustan Lever Ltd., Ranbaxy Laboratories Ltd., and Larsen and Tubro etc.

Section 3 (1) (i) of the Companies Act, 1956 defines a company as “a company formed and registered under this Act or an existing company”. Section 3(1) (ii) of the act states that “an existing company means a company formed and registered under any of the previous companies laws”. This definition does not reveal the distinctive characteristics of a company. According to Chief Justice Marshall of USA, “A company is a person, artificial, invisible, intangible, and existing only in the contemplation of the law. Being a mere creature of law, it possesses only those properties which the character of its creation of its creation confers upon it either expressly or as incidental to its very existence”.

Classification of Companies

As of now, the Companies Act, 1956 provides for various types of companies of which may be registered under the Act. The most common among these are :-

  1. Private Company ((Section 3 (1) (iii) as amended by /the Companies (Amendment) Act, 2000)).
  2. Public Company ((Section 3 (1) (iv) as amended by /the Companies (Amendment) Act, 2000)).
  3. Government Companies ((Section 617)).

A. Private Company

According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company is that company which by its articles of association:

i) limits the number of its members to fifty, excluding employees who are members or ex-employees who were and continue to be members;

ii) restricts the right of transfer of shares, if any;

iii) prohibits any invitation to the public to subscribe for any shares or debentures of the company.

Where two or more persons hold share jointly, they are treated as a single member. According to Sec 12 of the Companies Act, the minimum number of members to form a private company is two. A private company must use the word “Pvt” after its name.

The main features of a private company are as follows:

i) A private company restricts the right of transfer of its shares. The shares of a private company are not as freely transferable as those of public companies. The articles generally state that whenever a shareholder of a Private Company wants to transfer his shares, he must first offer them to the existing members of the existing members of the company. The directors determine the price of the shares. It is done to preserve the family nature of the company’s shareholders.

ii) It limits the number of its members to fifty excluding members who are employees or ex-employees who were and continue to be the member. Where two or more persons hold share jointly they are treated as a single member. The minimum number of members to form a private company is two.

iii) A private company cannot invite the public to subscribe for its capital or shares of debentures. It has to make its own private arrangement.

B. Public company

According to Section 3 (1) (iv) of Indian Companies Act. 1956 a public company is “one which is not a Private Company”, If we explain the definition of Indian Companies Act, 1956 in regard to the public company, we note the following:

i) The articles do not restrict the transfer of shares of the company

ii) It imposes no restriction no restriction on the maximum number of the members on the company.

iii) It invites the general public to purchase the shares and debentures of the companies

Differences between a Public Company and a Private company

1. Minimum number: The minimum number of persons required to form a public company is seven. It is two in case of a private company.

2. Maximum number: There is no restriction on maximum number of members in a public company, whereas the maximum number cannot exceed 50 in a private company.

3. Number of directors: A public company must have at least three directors whereas a private company must have at least two directors (Sec. 252)

4. Restriction on appointment of directors: In the case of a public company, the directors must file with the Register consent to act as directors or sign an undertaking for their qualification shares. The directors or a private company need not do so (Sec 266)

5. Restriction on invitation to subscribe for shares: A public company invites the public to subscribe for shares. A public company invites the public to subscribe for the shares or the debentures of the company. A private company by its Articles prohibits invitation to public to subscribe for its shares.

6. Name of the Company: In a private company, the words “Private Limited” shall be added at the end of its name.

7. Public subscription: A private company cannot invite the public to purchase its shares or debentures. A public company may do so.

8. Issue of prospectus: Unlike a public company, a private company is not expected to issue a prospectus or file a statement in lieu of prospectus with the Registrar before allotting shares.

9. Transferability of Shares: In a public company, the shares are freely transferable (Sec. 82). In a private company, the right to transfer shares is restricted by Articles.

10. Special Privileges: A private company enjoys some special privileges. A public company enjoys no such privileges.

11. Quorum: If the Articles of a company do not provide for a larger quorum, five members personally present in the case of a public company are quorum for a meeting of the company. It is two in the case of a private company (Sec. 174)

C.      Government Companies.

A Company of which the Central Government of by State Government or Government holds not less than 51% of the paid up capital singly or jointly is known as a Government Company. It includes a company subsidiary to a government company.

The share capital of a government company may be wholly or partly owned by the government, but it would not make it the agent of the government. The government on the advice of the Comptroller and Auditor General of India appoints the auditors of the government company. The Annual Report along with the auditor’s report is placed before both the House of the parliament. Some of the examples of government companies are – Mahanagar Telephone Corporation Ltd., National Thermal Power Corporation Ltd., and State Trading Corporation Ltd. Hydroelectric Power Corporation Ltd. Bharat Heavy Electricals Ltd. Hindustan Machine Tools Ltd. etc.

The following are the features of the Government Company

1. Incorporation -: The Government Company is registered under Companies Act, 1956. The provisions of Indian companies Act, 1956 are applicable in respect of conduct of meetings, rising of capital, appointment of directors, auditors, etc. It enjoys the status of a legal entity and therefore it can use or be sued by others.

2. Annual Accounts-: The annual accounts of a Government Company are placed before the parliament or state government for review.

3. Management-: It is managed by a Board of Directors, most of who are appointed by the government.

4. Exemption from Companies Act-: The Government reserves the right exempt such a company from certain provisions of the Indian Companies Act.

5. Objective –: It operates on commercial principles, and as such it, aim is to make profit apart from other objectives.

6. Need for Privatization -: There is growing move to privatize a good number of government Companies so as to improve their efficiency.

7. Capital Contribution -: Its Capital is contributed by Central/State Governments and public. The government contributes 51% or more of its paid up capital. The public hold minority shareholding in Government Companies.

8. Staff -: This type of organization can recruit its own employees and they are not government servants. Their terms of service are not governed by the civil service rules. However, the employees of departmental undertakings are Government servants, and are governed by Civil Service Rules.

The Companies Bill, 2012 (Bill) was passed by the Lok Sabha on December 18, 2012, replacing 56-year-old Companies Act, 1956. The Bill seeks to consolidate and amend the law relating to the companies and intends to improve corporate governance and to further strengthen regulations for Corporate. On its enactment, this new Companies law will allow the country to have a modern legislation for growth and regulation of corporate sector in India. The existing statute for regulation of companies in the country, viz. the Companies Act, 1956 had been under consideration for quite long for comprehensive revision in view of the changing economic and commercial environment nationally as well as internationally.

The new concept of One Person Company has been introduced. It is considered as revolutionary step taken by government to encourage unorganized proprietorship business to enter in to organized corporate world.

The concept “one person company” is widely accepted in developed countries and neighbor country – China. Minimum two members are required to form a private company and minimum seven members required for public company under prevalent law.

This is looked as barrier in forming private limited company by businessmen who do not want any participant in business. To remove this difficulty it was practice adopted to allot minimum share to someone in family or friend. But with introduction of OPC it will be possible to form a company with only one member. OPC provides benefit of both form of business- Proprietorship and Company. With OPC business can be run same way as proprietorship, of course by complying with law, and keeping liability of the member limited by share or guarantee, as the case may be. At the same time it has casted responsibility on the society and market players to recognize OPC as company and not another form of proprietorship business. Because much public interest not involved in OPC, many relaxations have been granted to OPC in compliances and procedural aspects. It will enable them to attain natural growth.

A One Person Company is still an idea in its infancy and is best for small enterprises looking at testing the waters, as an alternative to a proprietorship.

Companies can be classified into five categories according to the mode of incorporation based on number of members, based on control, based on ownership and based on nationality of the company. This article has discussed the three major types of companies i.e. Private, public and Government companies. It has discussed the new concept of ‘One Person Company’ introduced via the Companies bill 2012. Company may be defined as group of persons associated together to achieve some common objective. A company formed and registered under the Companies Act has certain special features, which reveal the nature of a company. These characteristics are also called the advantages of a company because as compared with other business organizations, these are in fact, beneficial for a company.