Kinds of companies

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Classification on the basis of incorporation

 Statutory companies- These are the companies

which are created by a special Act of the
Legislature. This is done only in special cases
when it is necessary to regulate the working of
the company for some specific purposes.
 Examples of such companies in India are: the
Industrial Finance Corporation, the Life Insurance
Corporation of India, the Air India, etc.
 Registered companies- These are the companies
which are formed and registered under the
Companies Act, 1956, or were registered under
any of the earlier Companies Acts.

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Classification on the basis of
liability
1. Companies with limited liability-

a) Companies with liability limited by shares: In this

case the liability of the members is limited only to
the amount of the shares held by them. If the shares
are fully paid, the liability of the member holding
such shares is nil.
Exception (Sec.45)
 If a company carries on business for more than 6
months after the number of members reduced below
statutory minimum, every person who knows this fact
and member during the time that the company so
caries on business after the six months, is severally
liable for the whole of the debts of the company
contracted that time i.e. after 6 months.
seema kadam
Contd…
b) Companies with liability limited by guarantee: In
this case, the members agree to pay a sum in addition to
the amount of the shares held by them if need arises, in
order to pay the creditors of the company.
 The additional amount payable by members is laid down
in the Memorandum or Articles of Association.
 This type of company is formed mostly when the work
is of nonprofit making nature, such as Chambers of
Commerce and for promotion of art, science, culture,
sports , or some similar purpose.
 It has a legal personality distinct from its members.
 The liability of members is limited.
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Contd..
c) Companies limited by guarantee may be with share
capital or without share capital: Where the company does
not have a share capital, it raises its capital through entrance
fees and subscriptions. This form is used mostly for clubs
and charitable organizations. The amount guaranteed by
shareholders is called up when the company is wound up and
its assets do not realize enough money to pay off its
liabilities.
2. Companies with unlimited liability: In this case, the
liability of the members is unlimited as is the case in
partnership or sole proprietorship. The members can be
called upon to pay an unlimited amount (even from their
private estates) to satisfy the creditors of the company when
it is wound up. Such companies are rare. Early in their
history, these companies were called joint stock companies.

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Classification on the basis of number of members

 Private company: According to section 3 (1) of

Companies act 1956.the company is private when its
minimum number of members is two and maximum
cannot be more than 50 and the minimum paid up capital
is Rs 1 lakh, private Company's shares are not freely
transferable and cannot invite public to subscribes its
shares and debentures.
 Private co. need not old statutory meeting and can
commence the business after obtaining “Incorporation
certificate”
 private co. must have minimum 2 directors and can allot
the share soon after its incorporation
 Private co. cannot invite deposits from public.
seema kadam
Contd..
 The quorum for private co. general meeting is two.
 Formation of private co. is simple and pvt. company is
suitable for small scale business.
 Example- A Private co. has 100 employee-member, 30 former
employee-members(i.e., who became members during the
course of their employment and continue to be members even
after their employment ceased) and 50 general members. The
company fulfils the above conditions as employee- members
(present or past) are not to be counted while determining the
strength of members.
 Companies Act (amendment) 2000-enhancing paid up capital
to 1 lakh within two years of commencement.
 Number of debenture holders in a Pvt. Co. may exceed 50 as
there is no restriction as per definition.
 Pvt. Co. must have at least 2 directors.

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Contd..
 Public company: According to section 3 (1) the company
other than private co. is called public company. In public
company minimum no of members are seven and maximum
no limit i.e. unlimited public companies shares freely
transferable subject to rule in articles of association.
 Public co. collects capital through public issue. So it is
compulsory for every public company to prepare prospectus
 Public co. can commence its business only after “Trading
certificate” from registrar of company.
 It is compulsory for public co. to hold statutory meeting
quorum (minimum attendance) for public co. meeting is 5.
 Public co. must have at least 3 directors and its minimum
paid up capital is Rs 5lakh.
 Companies Act (amendment) 2000-enhancing paid up capital
to 5 lakh within two years of commencement.
 Public Co. must have at least 3 directors.

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Contd..
 Deemed public company: According to section 43A of
companies act 1956,a private company was considered as
converted automatically into a public company under certain
circumstances such as company called “Deemed public
company”.
 These circumstances are:
a) Not less than 25% of paid up share capital of pvt company
is held by one or more public after advertisement.
b) When pvt company holds 25% or more of the paid up share
capital of public co.
c) When Pvt Company accepts deposits from public after
advertisement. Where its average annual turnover is not less
than Rs 25 crore for the last 3 financial years.
 The company (Amendment) Act 2000 has deleted the concept
of a private company deemed to be public. Therefore at
presenting India, deemed public co. do not exist.

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Classification on the basis of control
 Holding company [Sec. 4(4)]-A company is known as
holding company of another company if it has control
over that company.

 Subsidiary company [Sec.4(1)]- A company is known

as a subsidiary of another company when control is
exercised by the latter(called holding company) over
the former called a subsidiary company.

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Classification on the basis of
ownership
 Government company (sec.617)-A government
company means any company in which not less
than 51% of the paid-up share capital is held by-
a) The central Government, or
b) Any state Government or Governments, or
c) Partly by the central government and partly by
one or more state governments. Example-State
Trading Corporation of India Ltd. And Minerals
and Metals Trading Corporations of India Ltd.
 Example: Indian Telephone Industry (ITI), Bharat
Heavy Electronics Limited (BHEL) etc.

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Rules applicable to government companies

 Appointment of auditor and audit

reports(sec.619)-audit reports to be submitted to
Comptroller and Auditor-General of India.
 Annual report to be placed before Parliament (sec.
619-A)
 Provisions of Sec. 619 to apply to certain
companies (Sec.619-B) – It is intended to
strengthen the financial discipline in case of
companies in which more than 51% shares are
held jointly by Government, Government
companies, and Public financial corporations.
 Certain provisions of the Companies Act not to
apply (sec. 620)

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Contd..
 Foreign Company [sec. 591(1)]- A company
which is incorporated in a country outside India
and having business operation is India, is known
as Foreign company. Example- Citi Bank, G.E.
Capital etc.
 Minimum of 50% of the paid–up capital (whether
equity or preference or partly equity and partly
preference) of foreign company is held by one or
more citizens of India or/ and by one or more
corporate incorporated in India, whether singly or
jointly, such company shall comply with such
provisions as may be prescribed as if it were an
Indian company.[sec.591 (2)]

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Rules applicable to foreign
companies(Sec. 592-602)
1. Documents-
 Return of alteration
 Office where documents to be delivered.
2. Accounts
3. Obligations-
 Country of incorporation.
 Exhibition of name.
 Whether liability limited.
4. Service of documents on foreign company.
5. Office where documents to be delivered
6. Penalty
7. Registration of charges
8. Requirements as to prospectus.
9. Winding up of foreign companies.
seema kadam
Contd..
 Indian/Domestic Company: A company registered in
India as per the Indian Companies Act is known as
Indian/domestic company Example- Associated Cement
Company (ACC), Tata Iron and Steel Company
(TISCO) etc.

 Multinational Corporation (Company): A company

which is registered in one country but carries on
business in a number of other
countries.Toyota,accenture,microsoft,tata motors.

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CONTD..
 Association not for profit -(Sec. 25) of Act , however ,
permits the registration under a license granted by the
Central Government, of association not for profit with
limited liability without using the word ‘limited’ or the
words private limited to its name.
 The Central Government may grant such a license to an
association where it is proved to the satisfaction of the
Central Government that it-
a) Is about to be formed as a limited company for
promoting commerce, science, religion, charity or any
other useful object; and
b) Intends to apply its profits, if any, or other income in
promoting its objects and to prohibit the payment of any
dividend to its members.
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Contd..
 One-man company.
 Prohibition of large partnerships (sec.11)- in case will
be illegal association. Consequences of illegal
association-
a) Personal liability- every member is punishable with fine
which may extend to RS. 10,000.
b) Illegal association cannot enter into any contract.
c) An illegal association cannot wind-up under the
Companies Act- 1956.
 Penalty for improper use of words ‘limited’ and ‘private
limited’(sec.631)- punishable with fine may extend to
Rs. 500 for everyday upon which that name has been
used. seema kadam
 Formation procedure of the company

 By incorporation, a company comes in to existence. It

becomes a separate corporate entity. The promoters
follow following procedure to obtain the certificate of
incorporation:-
 Propose a name: The promoters ascertain and decide
upon the name of the company.
 Apply for the license: If the proposed company, wants
to run any industry for the establishment of which
license is required under Industries (Development and
Regulation) Act, 1951 then they should apply to the
concerned Ministry of the Central Government.

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Contd..
 Prepare requisite documents: The promoters should
prepare and finally get printed the Company's
Memorandum and Articles of Association.
 File necessary documents: Before a company is
registered, it is desirable to ascertain from the Registrar
of Companies if the proposed name of the company is
approved. Then the following documents duly stamped
together with the necessary fees are to be filed with
Registrar.
1. The Memorandum of Association duly signed by the
subscribers.

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 contd..
2. The Article of Association, if any signed by the
subscribers to the Memorandum of Association.

3. The agreement, if any, which the company purposes to

enter into with any individual for appointment as its
managing or whole-time director or manager.

4. A list of directors who have agreed to become the first

directors of the company and their written consent to act
as directors and take up qualification shares.

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Contd..
5. A declaration stating that all the requirements of the
Companies Act and other formalities relating to
registration have been complied with. Such declaration
shall be signed by-
 An advocate of the Supreme Court or High Court.
 An attorney or pleader entitled to appear before a High
Court.
 A Chartered Accountant practicing in India and who is
engaged in the formation of the Company.
 Any person who is named in the Article of Association
as a director, manager, or secretary of the Company.

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 Contd..
 Obtaining Certificate of Incorporation: When the
requisite documents are filed with the Registrar along with
the fees prescribed, the Registrar shall satisfy himself that
the statutory requirements regarding registration have been
duly complied with.
 If the Registrar is satisfied as to the compliance of statutory
requirements, he retains and registers the Memorandum, the
Articles and other documents filed with him and issues a
'certificate of incorporation', i.e. certificate of the formation
of the company.
 By issuing certificate of incorporation the Registrar
certifies "under his hand that the company is incorporated
and in the case of a limited company, that the company is
limited".
 contd..
 A public limited company can commence the business or borrow
the money only after it obtains the certificate of commencement
of business. These formalities are as follows.

 Where the company has issued a prospectus: {Section

149(1)}: Companies, which intend to invite the general public for
subscription of their shares or debentures, will have to appoint
underwriters or brokers for the sale of their shares or debentures
make an application to stock exchange for getting their shares or
debentures listed and issue the prospectus to the general public.

 It must also ensure that statutory declaration that is filed with the
registrar is verified by one of the directors, or secretary, provision
as to minimum subscription and no refund in case of failure to
apply are properly recorded in the statutory declaration, which is
to be verified and filed with the registrar of the companies.
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 Contd..
 Where the company does not issue the prospectus:
{Section 149(2)}: Such a company must file following
documents with the registrar of the companies:

 A statement in lieu of prospectus.

 A statutory declaration verified by one of the director or

secretary in which it should state the amount directors must
have paid for the shares taken or contracted to be taken;
If the Registrar of the companies is satisfied, then the
company shall be issued a CERTIFICATE OF
COMMENCEMENT OF BUSINESS, which will entitle the
company to start its business or borrow money.

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