Company- Definition, Characteristics and Types
The word ‘Company’ is thought to be derived from the Latin words ‘com’ (meaning- with or together) and ‘panis’ (meaning – bread). Thus, a company is usually defined as an association or a group of like-minded people formed for the sole purpose of carrying on some business. The businesses can range from selling commercial products/services to industries built solely for processing raw materials for further use in the market.
Now, let's delve into this topic a little further and understand more about what it means to be a company and also, what types of companies are there in the current market?
All in brief :)
Definition under Companies Act, 2013:
Section 2 (20) simply defines a company as - “Company means a company incorporated under the Companies Act, 2013 or under any previous law”.
The phrase “previous law” is defined under Section 2 (67) to mean- “Acts relating to companies in force before:
The Indian Companies Act, 1866 ;
The Indian Companies Act, 1866 ;
The Indian Companies Act, 1882;
The Indian Companies Act, 1913 ;
The Registration of Transferred Companies Ordinance, 1942 ;
The Companies Act, 1956; and
Any law corresponding to any of the aforesaid Acts or the Ordinances and in force”
Features of a company:
1. Artificial Person:
In the eyes of the law, a company is treated as a legal person and is classed under juridical persons. This means that a company enjoys many legal rights that an actual person holds in India. A company can:
Own or sell property under its own name,
Sue or be sued on its name and
Form partnerships with other companies.
Companies also have distinct names and have bank accounts to their name. Since it can act and do almost everything an actual legal person can do, it is called an artificial person.
2. Separate Legal Entity:
In the eyes of the law, a company is an independent legal entity from the people who control its operations i.e. the management. In case a member defaults on his payments, the company won’t be responsible for such default. The assets and liabilities of a company do not pass on to its members in most situations except in cases where the “corporate veil” is taken off.
This principle was further elaborated in Salomon v. Salomon (1987) where it was held that a company has a separate personality that is distinct from its members or subscribers even if a single shareholder is holding all of its share capital.
3. Limited Liability:
The liability of the members of the company is limited and is based on the quantum of contribution to the assets of the company i.e. the actual value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him when called upon to pay and nothing more, even if liabilities of the company far exceeds its assets.
In the case of a company limited by guarantee, the members (Guarantor) may have to cover some of the losses incurred by the company by using their own assets.
This principle is all about reducing one’s personal exposure to financial risk due to elements unrelated to him. That is why limited liability is classed as one of the crucial elements of a corporate form of organization of a business.
4. Perpetual succession:
The existence of a company is perpetual in nature i.e. it never ceases to exist. Any change in membership or fulfillment of objectives does not necessarily lead to the end of a company. Death, insolvency, bankruptcy, or insanity of members also does not affect the existence of a company.
In PNB v. Lakshmi Industrial & Trading Co. Ltd, the Allahabad High Court held that perpetual succession means that membership of a company may keep on changing from time to time, but that does not affect the company’s continuity.
5. Transferability of shares:
Section 44 of the Act provides that “the shares or debentures or any other interest of any member in a company shall be a movable property that can be transferred in the manner provided in the article of the company.”
What this means is that upon the incorporation of a company, its members can sell their shares in an open market and get a return on their investment without any hassle of withdrawing money from the company. This provides liquidity and stability for the investor (retail or institutional). Partnership firms miss out on this essential advantage as they do not fall under the ambit of the Companies Act, 2013.
6. Common Seal:
The recognition to a separate seal was given in the case Tata Engineering & Locomotive Co. Ltd. v. the State of Bihar. A common seal is the official signature of the company and marks its symbol of incorporation. However, as per the Companies (Amendment) Act, 2015, a company may or may not have a common seal.
Section 22 provides that a company, under its common seal, can authorize any person in respect of any specified matter, to act as an attorney to execute other deeds on behalf of the company, such deeds can be in or outside India. Usually, such a deed is passed only when signed with a common seal. However, after the 2015 amendment, if a company does not have a common seal, the assent to such deed may be given by the Company Secretary (CS) or by its Director(s).
Types of Companies:
The various types of companies in the current market are classified based on their characteristics below:
Based on registration and the number of members:
This Act also provides for three different types of companies that can be registered under the aegis of the Ministry of Corporate Affairs:
1. Public Company:
It is a joint-stock company (i.e a business owned by its investors) formed by a voluntary association of persons who pay the minimum paid-up capital of 5 Lakh INR at the time of registration. It is characterized by the term “Public Limited” or “Limited” following the company name.
Most public companies are listed on the stock exchange (provided they meet the required standards). This type of company can welcome retail investors as well as financial institutions to buy its shares or hold a position as a debenture holder (company’s creditor) or as a preference shareholder depending on the amount invested.
Moreover, there is no restriction when it comes to the transferability of shares or the number of employees/members a public company can have. However, a public company must have at least 7 members and 3 directors at all times. The management of this type of company has to issue a Prospectus which is a public document citing all the objectives, reports, and details about the company.
You can find the simple definition of a “public company” under Section 2 (71) o the Companies Act, 2013.
2. Private Company:
A private company is also a joint-stock company but the transferability of shares is limited and has to be consistent with the rules mentioned in the Act. A private company is formed by a voluntary association of persons who pay the minimum paid-up capital of 1 Lakh INR at the time of registration. This type of company can be characterized by the term “Private Limited (Pvt. Ltd.) following the company name.
This type of company is not traded/listed on the stock exchange and also cannot welcome the public to buy its shares or hold debentures directly. The number of members is also limited to 200 members. There should be at least 2 members and 2 directors at all times for a private company to exist.
The management of a private company does not need to issue a prospectus and can manage internal operations without much hindrance from the public or the Government (i.e. the compliance factors are quite less compared to public companies).
3. One Person Company (OPC):
Section 2 (62) of the Act simply defines OPC as a “company that has only one person as to its member”
Thus, an OPC is a setup that allows a single person to enjoy all the rights enjoyed by all companies registered/incorporated under the Companies Act, 2013. Due to the many advantages that companies enjoy, an OPC provides entrepreneurs with business at a nascent stage, the opportunity to enjoy all the corporate features.
However, a One Person Company also falls under the definition of private company [as under Section 2(68)] and therefore, has to comply with all the provisions that all private companies have to comply with.
The threshold for an OPC:
"In case the paid-up share capital of an OPC exceeds 50 lakh rupees or its average annual turnover of immediately preceding three consecutive financial years exceeds 2 crore rupees, then the OPC has to mandatorily convert itself into a private or public company through INC-5 form”- MCA
Based on Liability:
1. Company limited by shares:
The share capital in this type of company is provided in the form of shares i.e. small portions of the total share capital which signify the interest of an investor/shareholder in the said company. In this type of company, the liability of the members is limited up to the unpaid capital on the shares subscribed.
These companies may be registered as OPC, Private Ltd., or even as a public company.
2. Company limited by Guarantee:
In this type of company, the capital is not divided into shares but is provided by the management as a guarantee. A subscriber to the Memorandum guarantees a certain amount and puts signature against same.
Here, the percentage of the ownership is based on the amount that is guaranteed by an individual. Whenever the requirement of capital arises, the subscribers have to provide the agreed amount of capital to the company. The liability of members is limited up to the amount of guarantee provided only. However, some companies of this type can also share and it will be governed in the process mentioned in (1.).
3. Unlimited Company:
The liability of the members in this company is not limited to their part or capital contribution to the company. Here, the liability of the company extends to the member’s personal assets. The liability of the members arises at the time of winding up or bankruptcy or otherwise, whenever the capital is to be raised or debt is to be paid.
This type of company is now rarely seen as upcoming entrepreneurs seldom choose to have this complicated form of arrangement within a company. That is why a company limited by shares is the most common form of a company seen in the market.
Based on objective/nature of the company:
1. Foreign Company
An entity is registered as a foreign company when a majority of shares (i.e more than 50%) are owned by a foreign company. This entity then becomes a subsidiary [as under Section 2 (87)] of the majority holding company and is registered accordingly under the Companies Act, 2013 provided they can appoint a resident director and a permanent address in any part of India.
2. Section 8 Company:
This type of company is formed to carry out its functions as a charitable or non-profit organization. These companies are registered under Section 8 of the Companies Act, 2013 [hence the name]. These companies enjoy certain exemptions under the Act and their registration is a highly regulated affair as they are subject to approvals from many authorities.
3. Producer Company:
This is a type of company that’s primary objective is the production of agricultural goods covering aspects of the sale and carrying out import and export of the same. A producer company is mostly registered with 10 or more members being producers; or any 2 or more producer institutions; or its combination.
However, the liability of its members is limited to the extent of unpaid share capital by its members, much like all companies. This type of company is usually registered as a private company.
4. Small Company:
A company is classed as a small company if it satisfies the following conditions (recorded after 1st April 2021):
It is not a public company.
The paid-up share capital does not exceed 2 crore rupees.
Turnover does not exceed 20 crore rupees (as per the P&L account for the immediately preceding financial year)
This is mentioned in Rule 2(1) (t) of Companies (Specification of Definitions Details) Rules, 2014.
This classification does not apply to holding or subsidiary companies, Section 8 companies, and a company formed under any Statute. Small companies are essentially small businesses incorporated under the Companies Act, 2013 for which they enjoy certain exemptions in matters related to compliance.
5. Holding company:
A holding company is a company having the controlling power or majority of voting powers of another company (like holding shares of a subsidiary). A company is said to be the holding company if that particular company holds or owns at least 50% of another company and, has the authority to make management decisions, influences, and controls the said company’s board of directors.
Holding companies may exist for the sole purpose of managing and acquiring subsidiaries. In case a holding company owns 100% of a subsidiary, they are called wholly owned subsidiaries (WOS).
To get more company law insights, make sure you keep visiting this category and check out some of our other work in Competition Law and Trade Laws .
Hope this helps, good luck!