Companies Act Decoded: A Comprehensive Guide to the Different Types of Companies

Introduction

Companies Act 2013 was established to strengthen corporate compliance. The act governs companies registered under this act. The new act has introduced various changes. It has strengthened governance, eased compliance procedures and motivated whistleblowers to come forward.

The Companies Act has complied with company formation, operation, and dissolution regulations. One can establish a company by following the procedures under the Companies Act. These procedures are different for each type of company. What are these types of companies? 

Understanding all kinds of companies can be difficult. This blog covers some crucial types of companies in detail. Scroll down to understand the corporate structures available for businesses and individuals looking to establish a company. Below are the various types of companies as defined under the Companies Act.

Private Limited Company

A private limited company (Pvt Ltd) is a company that protects its members with limited liability. However, the company places certain restrictions on the shareholder’s ownership. These restrictions are: 

• There must be a minimum of 2 shareholders, 
• The number of shareholders will be limited to 200, and 
• The shares cannot be offered to the public. Public subscription is prohibited. 

Thus, the shares of the private limited company cannot be transferred easily.

Features of the private limited company

Limited Liability

Shareholders’ liability is limited by share or guarantee. However, the company can opt to be an unlimited private company, asking the members to pay off the liability of the company in case of dissolution. 

Number of members

Minimum of 2 and a maximum of 200 members.

Restriction on Transfer of Shares

Shares cannot be freely transferred.

No Minimum Capital Requirement

There was a minimum capital requirement, which has now been removed.

Public Limited Company

A public limited company (PLC) can offer its share to the public. They do not have any cap on the maximum number of shareholders. They can list their shares on a recognized stock exchange for public subscription.

They are eligible for public issue of shares through IPO (Initial Public Issue), FPO (Follow-on Public Offering), and Offer for sale. They have no restriction on the transfer of shares. 

Features of Public Limited Company 

Limited Liability

Shareholders’ liability is limited to their shares. However, a company can be an unlimited public company if it wishes to. 

Number of Members

Minimum of 7 members with no maximum limit.

Free Transferability of Shares

Shares can be transferred freely without any restrictions.

Minimum Capital Requirement

A certain amount of authorized capital is required. The company must have an authorized capital of Rs. 1,00,000 or more. 

One Person Company

The Companies Act of 2013 introduced the concept of One Person Company (OPC). This type of company can be registered with a single member who has limited liability towards the company. The company is inspired by a sole proprietorship and offers all the benefits of a company-type business structure. 

Features of a One-Person Company

Single Member

Only one person is required to form an OPC.

Limited Liability

The member’s liability is limited to the unpaid amount on their shares.

Nominee Requirement

A nominee must be appointed in case the sole member dies or becomes incapacitated.

No Minimum Capital Requirement

No prescribed minimum capital.

Section 8 company

A section 8 company acts as a not-for-profit entity. It is established to promote commerce, arts, science, sports, education, research, social welfare, religion, charity, or any other useful or socially beneficial object.

Such companies can distribute their profits to their members. The profits are redirected towards the promotion and attainment of their goals. Distribution of dividends is prohibited. 

Features of a Section 8 company

Charitable Objective

Must have a social, charitable, or non-profit objective.

No Minimum Capital Requirement

No minimum capital is required for incorporation.

Limited Liability

Members’ liability is limited.

Profit Utilization

Profits must be used to promote the company’s objectives.

Domestic Company

A domestic company refers to a company that is registered in the territorial boundaries of India. It includes private companies, public companies, and personal companies. 

Features of the Domestic Company

Incorporation in India 

A domestic company must have its headquarters or main office located in India.

Taxation

Domestic companies must follow all frameworks and guidelines laid out by various acts.

Regulatory Compliance

These companies must comply with all Indian corporate laws, including filing annual returns, maintaining statutory registers, and adhering to accounting standards specified by the Institute of Chartered Accountants of India (ICAI).

Shareholding

The ownership and shareholding structure of a domestic company can vary, but the critical criterion is its registration and operational base within India.

Foreign Company

A company or corporate body that is incorporated outside India is known as a Foreign Company. Foreign companies have a place of business in India. They can either work by themselves or through an agent. They can work physically or electronically and conduct any business activity in India. 

Features of a Foreign Company

Foreign Incorporation

The company is incorporated outside India.

Business Presence in India

The company has a place of business in India.

Compliance Requirements

The company must comply with the regulatory requirements of the Companies Act 2013.

Subsidiary Company

A subsidiary company is a company that is held by another company, known as the holding company. The holding company holds the majority share capital of the company or can appoint or remove a director of the subsidiary company. A company is a subsidiary company of the holding company: 

• Holds 51% or more shares in the subsidiary company, or
• It has the majority voting rights in the company or 
• It can control the composition of the board of directors. 

Features of Subsidiary Company

Control

The holding company exercises control over the subsidiary company. 

Separate Legal Entity

Despite being controlled by the holding company, the subsidiary maintains its own separate legal identity. 

Financial Statements

Subsidiaries must prepare and maintain their financial statements. 

Operational Independence

The subsidiary retains operational independence and manages its day-to-day activities.

Holding Company

A holding company is a company that owns a significant portion of shares or control over one or more subsidiary companies. The holding company oversees the operation of its subsidiaries. It keeps a watch on their operations. 

Features of a Holding Company

Ownership and Control

A holding company must own more than 50% of the equity shares of its subsidiary or control the composition of its board of directors.

Consolidated Financial Statements

The holding company is required to prepare consolidated financial statements that incorporate the financials of its subsidiaries. 

Regulatory Oversight

Holding companies are subject to stringent regulatory oversight to prevent misuse of control over subsidiaries. 

Strategic Management

Holding companies typically engage in strategic management, financial planning, and investment decisions for their subsidiaries. 

Legal Responsibility

Holding companies are not liable for the subsidiaries’ debts or legal issues unless explicitly guaranteed.

Government Company

A government company is a company whose 51% or more paid-up share capital is held by the government. Here, the government implies the central government, the state government, or the central government, along with one or more state governments. 

Features of a Government Company

Government Ownership

Majority ownership by the government.

Public Accountability

Subject to public sector regulations and accountability standards.

Commercial Objectives

Operates with commercial objectives but may also have public service obligations.

Dormant Company

A dormant company is registered under the Companies Act but acts inoperative. The company is held out for a future project. Sometimes, these companies are also incorporated to hold an asset or intellectual property. It has no significant account transactions.

Features of Dormant company

Inactive Status

Not engaged in significant business activities.

Asset Holding

Can hold assets or intellectual property.

Compliance Requirements

Must comply with certain regulatory filings and requirements.

Conclusion

The Companies Act of 2013 provides a broad framework that lays guidelines for the formation and operation of different types of companies. 

The companies are categorized and crafted carefully to meet specific needs and objectives. Whether an individual entrepreneur or small business owner, there is a type of company that can meet your unique requirements. 

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