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Law 05 Company Law 02 Classification of Companies Notes 20170314 Parab
Law 05 Company Law 02 Classification of Companies Notes 20170314 Parab
Types of
Companies
Balkrishna Parab
balkrishnaparab@jbims.edu
1 Introduction
Companies are by far the most common vehicles used to carry on business
activity both in India and around the world. They have become so because
governments have legislated to provide companies with various incentives,
rights and privileges. Governments have successfully used the law to create
a legal framework favourable to form various types of companies.
The word 'company' is derived from two Latin words pains meaning bread
and 'com' meaning "with or together". Originally, it referred to a group of
persons who took their meals together. In the context of business, a company
is understood as a group of persons who have voluntarily come together for
sharing profits derived from carrying on some business.
The law defines company as:
A company means a company incorporated under the
Companies Act, 2013 (CA 2013) or under any previous
company law1.
Not a very helpful definition. There is the commonly accepted view of what
can be called a company. Haney has defined a company as:
1
Section 2 (20) of the Companies Act, 2013.
Lecture Notes on Corporate Laws
Types of Companies
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Company Limited
by Guarantee
Companies Based
Company Limited
on Liability of
by Shares
Members
Unlimited
Liability Company
2
Section 2 (11) of the Companies Act, 2013.
3
58th Annual Report, Ministry of Corporate Affairs, Government of India.
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Lecture Notes on Corporate Laws
Types of Companies
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4
Section 2 (21) of the Companies Act, 2013.
5
Hennessy v National Agricultural and Industrial Development Association [1947] IR 159).
6
Section 4 (7) of the Companies Act, 2013.
7
58th Annual Report of the Ministry of Corporate Affairs, Government of India
8
Section 2 (22) of the Companies Act, 2013.
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Types of Companies
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Unlimited Company
A company having no limit on the liability of its members is called an
unlimited liability company. If company is being wound up, members can be
made to contribute to the companys assets without limit to enable it to pay its
debts.
An unlimited liability company is defined by CA 2013 as:
An unlimited company means a company not having any limit
on the liability of its members10.
It must be remembered that the liability of a member of an unlimited liability
company is to the company and not to the outside creditors. Such a company
may be set up with or without a share capital.
As on March 31, 2014 there were 375 active companies with unlimited
liability in India11. The personal liability of members of this type of company
is the reason why not many of them exist. They are sometimes formed by
those who wish to have separate corporate status and perpetual succession
even though these are not accompanied by limited liability.
9
58th Annual Report of the Ministry of Corporate Affairs, Government of India.
10
Section 2 (92) of the Companies Act, 2013.
11
58th Annual Report of the Ministry of Corporate Affairs, Government of India.
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Lecture Notes on Corporate Laws
Types of Companies
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Private Company
As Such
Private One-Person
Company Company
Companies Based
Public Small
on Pattern of
Company Company
Membership
Not-for-Profit
Company
12
Section 2 (68) of the Companies Act, 2013.
13
Section 31 of the Companies Act, 2013.
14
58th Annual Report of the Ministry of Corporate Affairs, Government of India.
5
Lecture Notes on Corporate Laws
Types of Companies
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15
Section 2 (62) of the Companies Act, 2013.
16
Proviso to Section 12 (3) of the Companies Act, 2013.
17
Section 4 (1) (f) of the Companies Act, 2013.
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Types of Companies
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The name of the other person referred above should be included in the
memorandum only with his written consent. This written consent is also
required to be filed with the Registrar at the time of incorporation. This other
person may withdraw his consent by following the prescribed procedure.
The member of a one person company may at any time change the name of
such other person by giving notice in the prescribed manner. It is duty of the
member of a one person company to intimate the company the change, if
any, in the name of the other person nominated by him by indicating in the
memorandum or otherwise and the company is required to intimate the
Registrar any such change18.
A one person company is required to have at least one director19. Where no
provision is made in the articles of a company for the appointment of the first
director of a one-person-company an individual being member is deemed to
18
Section 3 (1) of the Companies Act, 2013.
19
Section 149 (1) (a) of the Companies Act, 2013.
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Types of Companies
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be its first director until the director or directors are duly appointed by the
member20. A one person company is required to hold at least one meeting of
the board of directors in each half of a calendar year and the gap between the
two meetings should not be less than ninety days21.
If a sole member-director of a private company dies, there is no board to
approve the transfer of her shares under the terms of the will or on intestacy.
The company is then in effect paralysed, being without a board or
shareholders. The articles should therefore be altered to allow, for example,
the company secretary, if one has been appointed, to authorise a transfer or
allow the personal representatives of the deceased member to appoint a
director if the company has none. The director could then approve the transfer
and the business of the company could proceed.
Some of the privileges and benefits identified with one-person company are:
Mandatory rotation of auditor after expiry of maximum term is not
applicable;
The annual return of a one-person company shall be signed by the
company secretary, or where there is no company secretary, by the director
of the company;
The provisions relating to holding of general meetings, shall not apply to a
one-person company;
A one-person company needs to have minimum of one director;
For the purposes of holding meeting of board of directors it shall be
sufficient compliance if all resolutions required to be passed at a board
meeting, are entered in the minutes-book, signed and dated by the member
and such date shall be deemed to be the date of the board meeting;
The financial statements of a one-person company can be signed by one
director alone.
Cash flow statement is not a mandatory part of financial statements for a
one-person company.
Small Company
The concept of small company has been introduced for the first time by CA
2013. The law identifies some companies as small companies based on their
capital and turnover position for providing certain relief and exemptions from
regulatory compliances.
CA 2013 defines a small company as follows:
A small company is a company, other than a public company,
(i) paid-up share capital of which does not exceed 50 lakh
20
Section 152 (1) of the Companies Act, 2013.
21
Section 173 (5) of the Companies Act, 2013.
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Types of Companies
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rupees; or (ii) turnover of which as per its last profit and loss
account does not exceed two crore rupees.
The small company clause is not applicable to (i) a holding
company or a subsidiary company; (ii) a non-profit company22;
or (iii) a company or body corporate governed by any special
Act23.
The exemptions available to a small company include:
The annual return of a small company can be signed by the company secretary
alone, or where there is no company secretary, by a single director of the
company;
A small company may hold only two board meetings in a year, that is, one
board meeting in each half of the calendar year with a minimum gap of ninety
days between the two meetings;
A small company need not include a cash flow statement as part of its
financial statement.
Provision regarding mandatory rotation of auditors and maximum term of
auditors is not applicable to a one-person company.
Public Company
A public company is defined negatively, as a company other than a private
company. A public company is one which states in its constitution that it is a
public company and which complies with all the requirements laid down in
CA 2013 for registration or re-registration of a company as a public company.
Further, a public company cannot begin business or exercise any of its
borrowing powers unless the Registrar of Companies issues a certificate for
commencement of business. The law requires that the name of a public
company should end with the words limited, to distinguish from a private
company.
CA 2013 defines a public company as follows:
A public company is a company which is not a private
company. Further, a subsidiary of a public company is deemed
to be public company even where such subsidiary company
continues to be a private company in its articles24.
There is a common misconception that the securities of all public companies
are listed on the stock exchange. A listed company may be defined as
22
Registered under Section 8 of the Companies Act, 2013.
23
Section 2 (85) of the Companies Act, 2013.
24
Proviso to Section 2 (71) of the Companies Act, 2013.
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Types of Companies
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Non-Profit Company
A nonprofit company is a company that uses its surplus revenues to further
achieve its purpose or mission, rather than distributing its surplus to its
shareholders and members as dividends. This is known as the distribution
constraint. The designation as a nonprofit does not mean that the company
does not intend to make a profit, but rather that the company does not intend to
distribute profits as dividends.
CA 2013 defines a non-profit company as follows:
A company which has in its objects the promotion of
commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment or any
such other object can be registered as a non-profit company.
Such a company can apply its profits, if any, or other income in
promoting its objects and is prohibited from paying any
dividend to its members26.
As a non-profit company is registered under section 8 of the Companies Act,
2013, it is also known as Section 8 Company27.
A license from the Central Government is required for registration of a non-
profit company. This license may allow the company to be registered as a
limited company without the addition to its name of the word Limited, or
the words Private Limited. A non-profit company cannot alter the provisions
of its memorandum or articles except with the previous approval of the Central
Government28.
If on the winding up or dissolution of a non-profit company there remains
some money after the satisfaction of its debts and liabilities, the same may be
transferred to another non-profit company having similar objects.
Alternatively, the money may be transferred to the Rehabilitation and
Insolvency Fund formed set up by the Central Government for the purposes of
rehabilitation, revival and liquidation of the sick companies29.
25
58th Annual Report of the Ministry of Corporate Affairs, Government of India.
26
Section 8 of the Companies Act, 2013.
27
Such companies were earlier known as Section 25 companies as they were registered under
Section 25 of the Companies Act, 1956.
28
Section 8 (4) (1) of the Companies Act, 2013.
29
Section 8 (9) of the Companies Act, 2013.
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Types of Companies
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Associate Company
An associate company (or associate) is a company in which another company
owns a significant portion of voting shares. In this case, an investor does not
consolidate the associate's financial statements.
CA 2013 defines an associate company as follows:
An associate company, in relation to another company, means a
company in which that other company has a significant
influence, but which is not a subsidiary company of the
company having such influence and includes a joint venture
company32.
In this context significant influence means control of at least twenty per cent
of total share capital, or of business decisions under an agreement. However,
the 20 per cent cut-off is only indicative. A company may be considered as
associate irrespective of the extent of shareholding if it can be shown that the
investor has significant influence over the financial and operating policies of
the investee company.
Factors that indicate significant may include one or more of the following:
Representation on the board of directors
Participation in policy-making decisions
30
Ramirez, Jr., L:"The Case for Social Benefit Organizations".MiniDonations.org Blog,
February 2010.
31
Alvarado, Elliott I.: "Nonprofit or Not-for-profit -- Which Are You?", page 6-7. Nonprofit
World, Volume 18, Number 6, November/December 2000.
32
Section 2 (6) of the Companies Act, 2013.
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Types of Companies
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Lecture Notes on Corporate Laws
Types of Companies
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Subsidiary Company
A subsidiary is an entity that is controlled by a separate entity. The controlled
entity is called a subsidiary company and the controlling entity is called its
holding company. The holding and the subsidiary do not necessarily have to
operate in the same locations, or operate the same businesses, but it is also
possible that they could conceivably be competitors in the marketplace. Also,
because a holding company and a subsidiary are separate entities, it is entirely
possible for one of them to be involved in legal proceedings, bankruptcy, tax
delinquency, indictment and/or under investigation, while the other is not.
The most common way that control of a subsidiary is achieved is through the
ownership of shares in the subsidiary by the holding company. These shares
give the holding company the necessary votes to determine the composition of
the board of the subsidiary and so exercise control. This gives rise to the
common presumption that 50 per cent plus one share is enough to create a
subsidiary. There are, however, other ways that control can come about and
the exact rules both as to what control is needed and how it is achieved can be
complex.
A subsidiary may itself have subsidiaries, and these, in turn, may have
subsidiaries of their own. A holding company and all its subsidiaries together
are called a group, although this term can also apply to cooperating companies
and their subsidiaries with varying degrees of shared ownership.
Subsidiaries are separate, distinct legal entities for the purposes of taxation and
regulation. For this reason, they differ from divisions, which are businesses
fully integrated within the main company, and not legally or otherwise distinct
from it.
Subsidiaries are a common feature of business life and most if not all major
businesses organize their operations in this way. Large companies organize
their businesses into national or functional subsidiaries, sometimes with
multiple levels of subsidiaries.
CA 2013 defines a subsidiary company as follows:
A subsidiary company or subsidiary, in relation to any other
company means a company in which the other company (i)
controls the composition of the Board of Directors; or (ii)
exercises or controls more than one-half of the total share
33
Section 129 (3) of the Companies Act, 2013.
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Lecture Notes on Corporate Laws
Types of Companies
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Associate
Company
Subsidiary
Company
Companies Based
on Control
Holding Company
Government
Company
34
Section 2 (87) of the Companies Act, 2013.
35
Section 19 (1) of the Companies Act, 2013.
36
Proviso to Section 19 (1) of the Companies Act, 2013.
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Lecture Notes on Corporate Laws
Types of Companies
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Holding Company
A holding company provides a means of concentrating control of several
companies with a minimum amount of investment. The use of a holding
company is legally simpler and less expensive than other means of gaining
control of another company, such as merger or consolidation. A holding
company can reap the benefits of a subsidiarys goodwill and reputation, yet
its liability is limited to the proportion of the subsidiarys stock that it owns.
These and other factors make holding companies an effective form of
organization on both national and international levels. The parent company in
a conglomerate corporation is usually a holding company.
CA 2013 defines a holding company as follows:
A holding company, in relation to one or more other
companies, means a company of which such companies are
subsidiary companies37. A holding company is not allowed to
allot or transfer its shares to any of its subsidiary companies
and any such allotment or transfer of shares of a company to its
subsidiary company is void38.
Where a company has one or more subsidiary companies it is required: (i) to
prepare a consolidated financial statement of the company and of all the
subsidiary companies in the same form and manner as that of its own; place
these financial statements before the annual general meeting of the company;
and (iii) attach along with its financial statement, a separate statement
containing the salient features of the financial statement of its subsidiary
companies39.
Consolidated financial statements are financial statements that factor the
holding company's subsidiaries into its aggregated accounting figure. It is a
representation of how the holding company is doing as a group. The
consolidated accounts should provide a true and fair view of the financial and
operating conditions of the group. Doing so typically requires a complex set of
eliminating and consolidating entries to work back from individual financial
statements to a group financial statement that is an accurate representation of
operations. The consolidated accounts present the financial situation of a
group of companies as if they formed one single entity.
Government Company
A government company is a company in which fifty-one per cent or more of
the paid-up share capital is held by the Central Government, or by any State
37
Section 2 (46) of the Companies Act, 2013.
38
Section 19 (1) of the Companies Act, 2013.
39
Section 129 (3) of the Companies Act, 2013.
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Types of Companies
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Foreign Company
CA 2013 defines a foreign company as follows:
A foreign company means any company or body corporate
incorporated outside India which(i) has a place of business in
India either in its own name or through an agent, physically or
through electronic mode; and (ii) conducts any business activity
in India in any other manner42.
The key word in the above definition is place of business in India. It has
been held that merely holding of property cannot amount to having a place of
business. However, when representatives of a company incorporated outside
the country frequently stayed in a hotel in the country for looking after matter
of business, it was held that the company had a place of business in India43.
Additional compliance obligation is imposed on those foreign companies
where fifty per cent or more of the paid-up share capital is held by citizens of
India or by bodies corporate incorporated in India. Such a foreign company is
required to comply with the following provisions regarding the business
carried on by it in India as if it were a company incorporated in India44:
Delivery of certain documents to Registrar within 30 days of establishment
of business in India45;
40
Section 2 (45) of the Companies Act, 2013.
41
Section 143 (5) of the Companies Act, 2013.
42
Section 2 (42) of the Companies Act, 2013.
43
Tovarishestvo Manufacture Liudvig Rabenek, Re [1944] 2 All ER 556.
44
Section 379 of the Companies Act, 2013.
45
Section 380 of the Companies Act, 2013.
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Lecture Notes on Corporate Laws
Types of Companies
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Indian
Company
Companies
Foreign
Based
Company
Nationalitty
Offshore
Company
As on December 31, 2014, there were 3306 foreign companies active in India.
Of these foreign companies a majority (662) were incorporated in the USA,
followed by Singapore (454)48.
Offshore Company
The term offshore' means located or based outside of one's national
boundaries49. An offshore company is a company incorporated for operating
outside the country of its registration and/or the place of residence of its
directors, shareholders and beneficial owners. This is typically pursued to
realize various financial, legal or tax benefits.
Offshore companies are used for a variety of commercial and private purposes,
some legitimate and economically beneficial, whilst others may be harmful or
even criminal. Allegations are frequently made in the press about offshore
companies being used for money laundering, tax evasion, fraud, and other
forms of white collar crime.
46
Section 381 of the Companies Act, 2013.
47
Section 382 of the Companies Act, 2013.
48
http://profit.ndtv.com/news/economy/article-over-3-200-foreign-companies-operating-in-
india-government-601920
49
http://www.investopedia.com/terms/o/offshore.asp#ixzz3XCoUisY6
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Types of Companies
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50
"How we can make global companies pay their fair share of tax". Financial Times. 22 May
2013.
51
http://www.privacy-solutions.com/international-business-company-Mauritius.html
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Types of Companies
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and/or regulatory arbitrage, although there are some suggestions that the
amount of tax structuring may be less than commonly thought. Other
commonly cited legitimate uses of offshore companies include uses as joint
ventures, financing SPVs, stock market listing vehicles, holding companies
and asset holding structures, and trading vehicles. Intermediate uses of
offshore companies include uses as investment funds and private wealth
holding vehicles.
Shell Company
A shell corporation is a company which serves as a vehicle for business
transactions without itself having any significant assets or operations. Some
shell companies may have had operations, but those may have shrunk due to
unfavorable market conditions or company mismanagement. Shell
corporations are not in themselves illegal, and they do have legitimate
business purposes. However, they are a main component of the underground
economy, especially those based in tax havens.
Shell companies can also be used for tax avoidance. A classic tax avoidance
operation is based on the buying and selling through tax haven shell
companies to disguise true profits. The firm does its international operations
through this shell corporation, thus not having to report to its country the sums
involved, avoiding any taxes.
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Lecture Notes on Corporate Laws
Types of Companies
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Vanishing Company
In an era where capital market regulations were weak several fraudulent
companies were floated, which after raising capital, simply disappeared. Such
companies are termed as vanishing companies. Formally, vanishing companies
are companies which have defaulted on each of the following three criteria:
Not maintaining their registered offices;
Non-filing of statutory returns with the concerned Registrars of Companies
and stock exchanges as per listing agreements for a continuous period of
two years; and
Non-correspondence between the stock exchange and the company for a
long time.
A Central Coordination and Monitoring Committee (CMC), co-chaired by
Secretary, Ministry of Corporate Affairs and Chairman Securities and
Exchange Board of India (SEBI) was set up in 1999 to consider the issues
relating to companies that had come out with public issues and disappeared.
Out of the companies which came out with public issues during 1992-2005,
238 companies were identified as vanishing companies. Of these, 125
companies have since been traced out and another 32 such companies are
presently under liquidation and as such deleted from the list of vanishing
companies. As on March 31, 2014 there were 81 vanishing companies in
India52.
BALKRISHNA PARAB
Jamnalal Bajaj Institute of Management Studies,
University of Mumbai. Contact: E-Mail:
balkrishnaparab@jbims.edu; Cell: 9833528351;
Address: JBIMS, 164, DN House, HT Parekh
Marg, Backbay Reclamation, Mumbai 400 020.
52
58th Annual Report of the Ministry of Corporate Affairs, Government of India.
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