COMPANY CLASSIFICATION UNDER THE 2013 COMPANIES ACT

This article is written by Anjali Singh of 7^th Semester of BA LLB (Hons.) of UPES, Dehradun

ABSTRACT

The ability to categorize businesses under different headings has grown as a result of the expansion of the economy and the complexity of diverse business processes. This article examines the existing and prospective companies under various pieces of legislation and attempts to identify the many types of companies that already exist. It also includes corporations that are being considered by the Companies Bill of 2011. The scope and legal framework of these companies is also covered. This article explains every method of classifying firms in great detail. The major goal of classifying businesses is to maintain uniformity and regulate those businesses under similar legal regimes.

Keywords– Business, Companies, Economy, Corporation, Companies Act.

INTRODUCTION

Numerous businesses, including limited liability companies, investment firms, and public and private corporations, operate in the Indian economy. These multiple market participants may initially appear to differ from one another, but they can be classified into the following groups based on a few distinguishable shared traits. This article attempts to call your attention to the traditional classification of businesses based on elements like responsibility, control, incorporation, share transferability, etc. 

CLASSIFICATION OF COMPANIES

The Businesses Act of 2013’s Section 7 defines the modes of incorporation and incorporation processes, which may be used to classify the businesses.

The day of incorporation is the day the company receives a legal identity, or the day the company is considered to have been born in the eyes of the law. The different types of corporations and their characteristics are defined in Section 2 of the Corporations Act, 2013.

• COMPANY CLASSIFICATION ACCORDING TO THE YEAR OF INCORPORATION

KINGDOM CHARTER COMPANY

It might be better described as the business established with the sovereign’s or the crown’s consent. Before the Companies Act’s registration process, this method of formation was used. The crown issues a charter to anyone who asks to establish a cooperative or a business. The East India Company (1600) and The Bank of England (1694), to mention a couple, were established under charters issued by the then-Crown of England. These businesses employing the body of the charter have legal existence thanks to the sovereign’s approval. Any Companies Act no longer recognizes this method of incorporation for the formation of new companies.

STATUTORY COMPANY

As the name implies, they are businesses that are established utilizing a unique statute approved by the State Legislature or the Parliament. The Reserve Bank of India, the Life Insurance Corporation of India Act, and other entities are examples of statutory companies in India.

When there is a conflict between the statute under which these companies were formed and the Companies Act 2013, the statute, which is special legislation, prevails over the general law of the Companies Act. This power to be bound by statute comes from the statutory origins of these companies. According to the authority granted to them by the Indian Constitution, both the State and the Central parliaments have the authority to write such laws for incorporation.

REGISTERED COMPANY

firms that are registered under the Companies Act are considered registered firms, as stated in Section 2(20) of the 2013 Companies Act. The Registrar of the Company also gives certificates of incorporation to companies.

• CLASSIFICATION OF COMPANIES BASED ON THE LIABILITY OF MEMBERS

The limit to which members will be liable if such liability were to befall the business is described by the term “liability upon the members,” which is also used to categorize companies. Depending on the members’ liability, the companies can be divided into.

COMPANIES LIMITED BY SHARE:

These businesses are described in Section 2(22) of the 2013 Companies Act. The number of shares kept unpaid determines the members of such a company’s obligation. The authorities may be informed of this obligation related to the retained shares. The shareholder or member is no longer held responsible for anything after making the payment towards the security. Both during the company’s operation and even during the winding-up procedure, liability may be imposed.

COMPANIES LIMITED BY GUARANTEE

These businesses are described under Section 2(21) of the 2013 Companies Act. In a corporation where liability is limited by guarantee, the member has promised in the memorandum of association to reimburse the same sum upon the dissolution of the corporation. The members’ liability in these corporations is restricted to the commitment they made. Trust research associations and other businesses have their liabilities restricted by guarantee.

UNLIMITED LIABILITY COMPANY

The amount of potential liability that may accrue to the members of these businesses, as defined by Section 2(92) of the Businesses Act, 2013, is not capped. The unlimited liability firm is responsible for any debts owed to these members to the degree of their ownership stake. When it comes to the Indian market, these companies are not very well-known.

• DIFFERENCE BETWEEN LIMITED AND UNLIMITED COMPANIES

Limited liability and unlimited liability companies are both acceptable.

• The members’ responsibility is limited to the amount they have contributed to the business.
• Personal assets or properties won’t be confiscated if the company goes bankrupt or dissolves;
• The liability of the members is not inversely correlated to the investment in their firm; Even the member’s personal property will be surrendered to the company’s responsibility.
• CLASSIFICATION OF THE COMPANY BASED ON THE NUMBER OF MEMBERS

When categorizing a corporation, the number of its members is taken into consideration. The headings listed below go into more depth about this company’s classification. The following categories of companies may be determined by the number of members:

PRIVATE COMPANY

Private corporations, as defined by Section 3(1)(b) of the Corporations Act of 2013, are particularly limited in nature and may restrict the right to transfer shares in their articles of association. In such a firm, there may be a maximum of 50 members. Such corporations do not offer their shares or debentures to the general public. A corporation must have two members to be referred to as a private company, and it is established that two members who jointly own one share are only counted as one member. Private corporations can be quickly identified by the prefix “Pvt. Ltd.” in their names.

PUBLIC COMPANY

Public firms are those that are not private firms, as defined by Section 2(71) of the 2013 Companies Act. A public company must have at least 7 members, as required by Section 3(1)(a) of the Companies Act, 2013, to be formed. The ability to transfer shares and debentures of a public company to the general public is a feature inherent to public companies.

• CLASSIFICATION OF COMPANIES BASED ON DOMICILE

Based on their domicile the companies may be classified into:

FOREIGN COMPANY

According to Section 2 (42) of the Companies Act of 2013, a company that is located outside of India but has a registered place in India—which may be a physical or electronic address, or perhaps the company has ownership through its agents, representatives, or managers—is referred to as a foreign company. The new Corporation Act’s inclusion of the aforementioned term has expanded the definition of foreign corporations to include entities with an electronic presence in India.   Names of corporate behemoths like Whirlpool of India Ltd., Timex Group India Ltd., Ambuja Cement Ltd., etc. are on the list of international firms listed in India.

INDIAN COMPANY

Any company registered under the Companies Act, 2013, or any other earlier statute, is referred to as an Indian Company, according to Section 2(20) of the Companies Act, 2013. With the aid of its office address, an Indian firm can establish its locus standi, and the law stipulates the procedures to be followed when exercising these legal rights.

• CLASSIFICATION OF BUSINESSES BASED ON A VARIETY OF VARIABLES

The companies may be categorized into the following groups according to various random factors:

GOVERNMENT ENTERPRISE

Any company in which the Central/State Government holds at least 51 percent of the paid-up share capital, or where the Central Government holds a portion of the company while one or more State Governments hold the remainder, is referred to as a Government Company under Section 2(45) of the Companies Act, 2013. The lack of autonomy is the main disadvantage of owning a government-run business.

HOLDING, AFFILIATED, AND SUBSIDIARY COMPANIES

A firm is considered the holding company of another company under Section 2(46) of the Companies Act, 2013, if it has administrative control over another company. A company’s affairs could be under such control. A firm is referred to as a subsidiary company of another business under Section 2(87) of the Companies Act, 2013 when the other company exercises control over the subsidiary company.

A business is regarded as a subsidiary business of another when:

• If the other company exercises or holds more than 50% of the entire voting power, meaning that holders of preference shares have the same voting rights as holders of equity shares, or
• 50% of its nominal equity share capital is owned, or the company has authority over the board of directors makeup.
• If the business is a subsidiary of another subsidiary of the controlling firm.
• In addition to the aforementioned holding and subsidiary companies, the holding power also comprises a different category of a company known as an associate company.

PARTNER COMPANY

These firms, as defined by Section 2(6) of the Firms Act of 2013, are those over which another company has a considerable amount of control, but they are not the Associate Companies’ subsidiaries. These associate companies include joint venture companies.

The explanation accompanying the clause requiring the influencing business to hold 20% of the share capital or any arrangement that places the decision-making of the associate on such influencing company can be used to immediately infer the significant control. Since it establishes a more logical baseline for an associated relationship between the two companies, the Associate Company concept has been considered a sign of transparency in the company’s operations.

ONE MAN COMPANY

A corporation is referred to as a “One Man Company” under Section 2(62) of the Companies Act if just one individual owns all of the company’s shares. Some shareholders of the namesake firm hold one or two shares each to satisfy the legislative requirement of a minimum number of members. The primary shareholder typically proposes the named shareholder members. All of the company’s profits are distributed to the major shareholder, who also benefits from restricted liability. These businesses now enjoy legal sanctity.

DIFFERENCE BETWEEN ONE PERSONAL COMPANY AND A SOLE PROPRIETORSHIP

The primary or core distinction between a sole proprietorship and a one-person firm is based on the restrictions or extent of liability in the one-person corporation. A one-person company distinguishes the promoter from the distinct entity of the company, which is how it differs from a sole proprietorship. If the one-man business is found to be liable or subject to claims, the director’s culpability is constrained.

INVESTMENT COMPANY

Companies with a primary operation or transaction involving the securities of other companies are referred to as investment firms under section 186 of the 2013 Firms Act. Securities offered by this organization may take the form of shares, debentures, or other securities. In its most common usage, the word “investment” means to acquire a resource and hold it to earn interest. However, in the case of an investment company, the investment is intended to cover not only the acquisition and holding of the securities but also, potentially, the sale of those securities whenever their value increases.

The investment company established under Section 186 of the Companies Act of 2013 bases its investment decision on an analysis of the share market trend and the Company’s potential for maximum profit. To achieve the company’s desired profits, understanding the stock market’s generally used terms for the bear and bull markets as well as the trend is essential.

There are still two points of view regarding how an investment business operates and what makes its transactions unique. According to one set of assertions, investment companies should only buy securities and keep them to earn interest. The alternative school of thinking contends that in addition to buying and holding, the investment corporation may also profit by selling the securities.

New kinds of Companies recognized under the Act, 2013

DORMANT COMPANIES

When a company is formed under Section 455 of the Company Act, 2013, it may apply to the Registrar in the prescribed manner to become a dormant company if it intends to engage in future business or hold an asset, such as real estate or intellectual property, without engaging in any significant accounting transactions.     

The explanation for this clause explains that an inactive firm has not conducted any business transactions, operations, etc. for a period of two years or one that has not filed its annual reports or financial statements in the previous two years. These transactions do not include all of the payments that the corporation is required to make to the Registrar and other payments that are required by other laws.

The Registrar grants the applicant company the certificate of the inactive corporation. The list of inactive corporations must be kept up to date by the registrar. A corporation must pay the required amount to continue being listed as a dormant company on the registrar’s files. The Company may turn the Dormant Company back into an Active Company upon Request.

CONCLUSION

Companies have been categorized in several ways depending on their independence, liability, financial conduct, etc. These divisions should not be seen in isolation because the Company may combine two or more distinguishing qualities from the aforementioned companies to create a whole new category all its own. The several types of companies were only developed to make it simpler to comprehend the intricate legal entity that is a company.

REFERENCES

• https://taxguru.in/company-law/types-companies-companies-act-2013.html
• https://www.writinglaw.com/types-of-companies/