DIBL & CLI (2023-2024)

1st -Internal Assessment – Company Law (DIBL)

Topic
Different Types of Companies and Steps to be Followed for their
Incorporation
Companies Act, 2013

NAME: Prithvirajsingh Bayas

PRN: 23010167061

COURSE: DIBL & CLI

BATCH: 2023-2024
 Introduction

A company is a legally recognised organisation created by a group of individuals to conduct

and manage a commercial or industrial business enterprise. A company’s structure can vary
based on tax and financial liability based on the corporate law of its jurisdiction.

The type of business structure a company chooses is usually determined by the industry in
which it operates and help us understand the company’s ownership structure.

Additionally, there is a distinct difference between private and public businesses as the
ownership arrangements, regulations and financial reporting obligations vary for each. 1

The Companies Act, 2013

The Companies Act was enacted by the Government on April 1, 2013 and came into force
exactly a year later on April 1, 2014. This act was introduced to give Indian companies a
general framework and set of regulations. The Act is an all-inclusive and comprehensive
regulation that addresses every facet of business operations.

The overall aim of introducing this act was to establish a thorough framework for India’s
corporate regulations, to facilitate the establishment and operation of Indian companies, to
encourage India to adopt corporate governance and to encourage entrepreneurship in order to
enhance the nation’s economic development. 2

Types of Companies

Section 2(20) of The Companies Act, 2013 describes a “company” as “a company

incorporated under this Act or under any previous company law.”3 Thus, it can be said that a
company is an association of people with perpetual succession and a distinct legal entity.

1
https://www.investopedia.com/terms/c/company.asp#:~:text=A%20company%20is%20a%20legal,corporate%2
0law%20of%20its%20jurisdiction.
2
https://unacademy.com/content/ca-foundation/study-material/business-laws/the-companies-act-
2013/#:~:text=The%20Government%20of%20India%20introduced,marketplace%20and%20increase%20corpor ate
%20transparency.
3
Section 2(20), The Companies Act, 2013
The capital of the businesses is split up into tiny denominations called “shares.” 4 The term
“distinct legal entity” denotes the company’s existence apart from that of its stockholders. A
business may file lawsuits or be sued, and it may own assets in its name. Likewise, “perpetual
succession” denotes the company’s eternal existence despite the arrival and departure of
individual members. 5

There are many different types of companies, based on varying factors and these include: 6

Based on the Number of Members:

1. Public Companies
A Public Company is defined under Section 2(71) of the Companies Act. This
company requires a minimum of 7 partners and no upper limit is given. Here, a
minimum paid- up capital of five lacs should exist. Additionally, a private company
7
that operates as a public company’s subsidiary will be regarded as a public business.
According to Section 58, the shares of a public company are freely transferable. 8

2. Private Companies
A private company9 is a company where there are minimum two members, and
maximum two hundred members, however joint members of shares are counted as
one member. There is a minimum paid up capital of one lakh and there is no upper
limit.
In this company, there are restrictions on transferability of shares to ensure the
sanctity of the company. These companies are not allowed to accept deposits from the
public and cannot invite public to subscribe to its shares either. There is a requirement
of minimum two directors, and no independent directors are required. 10

3. One-Person Companies
A One Person Company 11(OPC) is also known as a sole proprietorship. There must
be only one director and one member in the company. Here, a “nominee” is extremely
essential as he has the highest importance after the death of the original member as
the

4
Section 84, The Companies Act, 2013
5
https://www.legalwindow.in/types-of-companies-under-companies-act/
6
https://www.legalwindow.in/types-of-companies-under-companies-act/
7
https://www.toppr.com/guides/business-studies/forms-of-business-organisations/types-of-companies/
8
Section 58, The Companies Act, 2013
9
Section 2(68), The Companies Act, 2013
10
https://www.toppr.com/guides/business-studies/forms-of-business-organisations/types-of-companies/
11
Section 2(62), The Companies Act, 2013
 business would cease to exist after his death. Thus, appointment of a nominee is
essential at the time of incorporation of the company. This procedure is not followed
in other companies since they have perpetual succession. 12

Based on Liability:

1. Companies limited by shares

This company describes a business wherein each partner’s liability is capped at the
amount stipulated in the partnership agreement. However, the obligation could be
satisfied with the share’s outstanding balance. Even in the process of liquidating the
business, partners may still be held legally liable. It is significant to remember that
after the shares have been completely repaid, no money may be demanded from the
members. 13

2. Companies limited by guarantee

With this kind of business, a partner’s liability is capped at what they agree to
contribute to the company’s assets in the event of dissolution. Put simply, the amount
of the guarantee provided by the shareholders in the partnership agreement sets the
limit on their liability. Members of the company are obligated to guarantee the
payment of the company’s debts during liquidation. Clubs, trade associations,
research associations, etc. are a few types of these societies. 14

3. Companies with unlimited liability

This is applicable to businesses that don’t assess their members’ liability. Members
may use their assets to pay off the company’s debt, and their liability is unrestricted.
They might or might not own equity.

12
https://www.geeksforgeeks.org/one-person-company-meaning-and-characteristics/
13
https://www.upcounsel.com/meaning-of-company-limited-by-
shares#:~:text=According%20to%20Section%202%20(22,or%20as%20it%20is%20ending.
14
https://www.investopedia.com/terms/l/limitedliability.asp#:~:text=%25%2025%25%200%25-
,What%20Is%20Limited%20Liability%3F,risk%20if%20the%20company%20fails.
Based on Incorporation:15

1. Statutory Companies
This is applicable to the businesses that were incorporated under a unique
parliamentary or state legislative act. This kind of business’ primary goal is to serve
the public interest. The Companies Act, 2013 has limited applicability to them
because they are constituted under a different law. In the event of a conflict, the
Companies Act 2013, will give way to the Special Act for the situation.

2. Registered Companies
Companies categorised as registered under the Companies Act, 2013 or any earlier
Companies Act are those that have registered under its provisions. This kind of
business is established after obtaining a certificate of incorporation (ROC).

Based on Residence

1. Foreign Companies
A “foreign company” is defined as any company or body corporate having its place of
16
business or conducting business in India either directly or through an agent. This
kind of business is subject to the rules outlines in Section 379 through 393.

2. Indian Companies
This is applicable to businesses that have their registration and incorporation
completed in India. It’s an all-encompassing term that encompasses nearly every other
kind of business.

Other Companies:17

1. Small Companies
A “small company”18 is defined as a business that is not a public company and that
satisfies the requirements of having a share capital paid up to a maximum of 50 lakh

15
https://www.legalwindow.in/types-of-companies-under-companies-act/
16
Section 2(42), The Companies Act, 2013
17
https://www.legalwindow.in/types-of-companies-under-companies-act/
18
Section 2(85), The Companies Act, 2013
 Rupees, and that there is no more turnover than two crore Rupees in the year prior to
that.

2. Subsidiary Company
A subsidiary company19 is defined as a company in which the holding company
manages and controls the composition of the board of directors. If the company has
the authority to nominate or remove a majority of the board members, then control
exists. Thus, authority is possessed over more than half of the voting rights of
subsidiary.

3. Section 8 Company
A Section 8 Company20 is also known as a non-profit organisation. This company’s
characteristics include:
a. The company’s mission; whether it is for the promotion of commerce, art, science,
sport, education, research, welfare, etc.
b. It forbids giving its members dividend payments
c. It is not permitted for a Section 8 company to append “Ltd” or “private Ltd” to its
name.
d. Government-run businesses
e. A government company is one in which at least 51% of the paid-up share capital
is owned by the federal government, state governments, or both.

4. Dormant Companies
This company is also known as a sleeping company. Here, a company that, during the
previous two fiscal years, has not conducted business or executed any significant
transactions.

5. Producer Companies
A producer company consists of legally recognized associations which are started in
order to raise their standard of living and guarantee steady income and profitability
especially formed by farmers. Only a person who works in the primary sector is
eligible to join such a company. The name in this company commonly has the words
“Producer

19
Section 2(87), The Companies Act, 2013
20
Section 8, The Companies Act, 2013
 Company Limited” written in them. A production company can have five to fifteen
directors.

6. Holding Companies
In Section 2(46) of the Companies Act, 2013, 21 a holding company is defined. These
companies are subsidiaries of the company in question.

7. Associated Companies
A company in which another company has significant influence but is not a subsidiary
of the company exercising influence is referred to as an associated company under
Section 2(6) of the Companies Act of 2013.22 The ability to exercise control over at
least 20% of the total voting rights or involvement in the management of an affiliate’s
affairs is referred to as a “significant decision.”

Incorporation of a Company Under The Companies Act, 201323

Section 3 of Companies Act of 2013 looks after the “Formation of a company.” The
following is the procedure for the same.

In order to incorporate a company, the subscriber must submit the following company
registration documents to the registrar whose jurisdiction the proposed company’s registered
office is located.

1. The company’s articles and memorandum. Each and every subscriber must sign the
memorandum.
2. The individual involved in the company’s formation must attest to their compliance
with all Act regulations and requirements. The declaration must be signed by the
individuals listed in the Articles.
3. The following information should be included in an affidavit submitted by each
subscriber to the memorandum and person designated as the first director in the
articles:

21
Section 2(46), The Companies Act, 2013
22
Section 2(6), The Companies Act, 2013
23
https://www.toppr.com/guides/business-laws/companies-act-2013/registration-and-incorporation-of-a-
company/#:~:text=Section%203%20of%20the%20Companies,can%20form%20a%20private%20company.
 a. A declaration that no offence related to the creation, advancement, or
administration of any business has been committed.
b. In the previous five years, he has not been found guilty of fraud or any other
breach of duty to any company.
c. To the best of the registrar’s knowledge, the documents are accurate and complete.
4. Letterhead address while the registered office is being established.
5. If the Memorandum’s subscriber is an individual, he must submit identification as
proof of identity along with his full name, residential address, and nationality. Provide
the prescribed documents if the subscriber is a body corporate.
6. All persons listed as subscribers to the Memorandum in the Articles must submit the
information mentioned in the preceding point in addition to their Director
Identification Number.
7. The people listed in the company’s articles as its first directors are required to furnish
information about their ownership stakes in other businesses or organisations, as well
as their permission to serve as directors of the company in the format and manner
specified.

Issuing the Certificate of Incorporation

Following receipt of the data and company registration documents, the Registrar registers the
data and paperwork and issues a Certificate of Incorporation in the format required.

Corporate Identity Number (CIN)

Additionally, the Registrar assigns the business a Corporate Identity Number (CIN), which
gives it a unique identity. CINs are assigned as of the company’s incorporation date. This
date appears on the certificate.

Maintaining Companies of Company Registration papers

Until it dissolves, all information and records must be kept on file by the company.
Furnishing False Information at the Time of Incorporation

When a company is being formed, a person can provide inaccurate or misleading information
or knowingly omit any important information from the documents submitted to the Registrar.
In this case, the person may be held liable for fraud under Section 447.

The Company is Already Incorporated Based on False Information

The promoters, first directors, and persons making a declaration are subject to a Section 447
fraud action if, after the company has already been incorporated. In this case, the Order of the
National Company Law Tribunal (NCLT) can pass orders to:

a. Enact a resolution to control the company’s administration or include modifications to

its articles and memorandums.
b. Allow its members’ liability to be limitless
c. Direct the company’s name to be taken down from the Registrar of Companies
d. Direct the business to close
e. Pass any additional commands as it sees fit.

Conclusion

Acknowledging the variety of business structures outlined in the Companies Act, 2013 can
help entrepreneur’s mange the challenges of company formation, even though selecting the
ideal structure for your Endeavour can be daunting. Choosing the right organizational
structure promotes compliances, streamlines operations, and lays the groundwork for
sustainable, long- term growth.