A company can be defined as a legal entity established by a person or group of people to conduct various business activities. As per Statista reports, the South Asian country of India accounted for over 1.66 million registered companies. The company concept is crucial in providing a solid structure to businesses, conducting their operations, and ensuring an upward growth trajectory.
Hence, selecting the correct type of company is mandatory for making informed decisions and boosting everyday operations, tax and legal liabilities, paperwork requirements, fundraising abilities, and growth potential. The Companies Act 2013 highlights that companies are classified based on the number of members, control, liability, access to capital, ownership, etc. This legal framework allows entrepreneurs and investors to conveniently choose a business structure that perfectly complements their operational demands.
Classification of companies
There are several factors that businesses should consider before choosing the right company type.
Nature of business
Understanding whether the business is commercial, industrial, or charitable will aid in influencing business decisions.
Business objectives and vision
A business’s objectives, vision, and mission strikingly differ from another company’s. So, identifying this essential factor is a must to make informed decisions.
Control and ownership
Before finalising the type of company, every business should consider its desired control over the company and how much investment is required to scale its growth and presence.
Regulatory compliance
Every company type has specific compliance and regulatory needs, which is why businesses must consider this factor to ensure that every governance requirement is met.
Scale of operations
Businesses’ size and growth potencies are vital for selecting the right company type.
Tax implications
In India, taxes are an essential consideration because the taxing authorities treat each form of business structure differently.
Liability concerns
It signifies the amount of personal liability entrepreneurs expect to assume.
The various types of companies under the Companies Act 2013
The Companies Act 2013 presents numerous new concepts and improves business performance in India in terms of legal requirements. In this connection, the following are the main types of companies according to the Act:
One Person Company:
The Companies Act of 2013 outlined the One-Person Company (OPC) concept. An OPC is a company with only one member who can also be a director. Although it is supposed to have only one member, an OPC can have up to 15 directors at most. As per a Statista report, Maharashtra recorded about 16,54 registered OPCs in FY 2022, followed by Uttar Pradesh, which witnessed 10,76 companies registering for OPC.
Private Limited Company:
As one of the most popular company types in India Private Limited Company has no more than 200 members. Businesses need at least two people who can’t transfer their shares to establish this company, making it ideal for those wishing to register their businesses as private entities. The directorship must involve at least two persons but not more than 15 in any such organisation. As of October 2022, there were about 1.49 million registrations for private companies, of which 1.42 million were listed as Private Limited Companies.
Public Limited Company:
A public limited company is where the general public can hold shares. While there is no cap on the number of shareholders in this company, there should be at least seven to establish it. Besides, having a minimum of three directors and a maximum of fifteen is compulsory in this type of firm. During the fiscal year 2022, more than 6,819 companies were listed on two stock exchanges in India- the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Section 8 Company:
Any group of individuals can register a company under section 8 of the Act for charity. These companies promote advancing commerce, education, research, sports, social welfare, charity, environmental protection, religion, etc. The profits these entities generate should be ploughed back into the organisation, while other sources of revenue will be used for proper activity functioning. Here, shareholders are not given dividends from these entities.
Types of companies according to size
The MSME Act constitutes the legal foundation of Micro, Small and Medium Enterprises (MSMEs) development in India. In February 2023, almost 13.8 million small companies were listed on the Indian government’s Udyam registry portal, which represents 96 per cent of the MSME category. MSME has several categories depending on their size and turnover:
Micro Companies:
A micro company’s investment in machinery and plant cannot exceed INR 1 crore, and its annual turnover should also not exceed INR 5 crore.
Small Companies:
Small companies are those that have invested in plant and equipment worth less than INR 10 crores and have a yearly turnover of below INR 50 crores. According to the Companies Act of 2013, businesses whose paid-up share capital is less than INR 4 crores while still maintaining turnover levels below INR 40 crores fall under the definition of small companies and enjoy a range of privileges.
Medium Companies:
For medium-sized businesses, the total investment in plant and machinery must be no more than INR 50 crore, and the annual turnover cannot be over INR 250 crore.
Types of companies based on liability
When a company is bankrupt, incurs a loss, winding up or paying the debt, at that time, the company’s shareholders’ liability is born under a limited or unlimited extent. Therefore, a company started under The Companies Act 2013 can be categorised according to these rules in terms of its shareholders’ liabilities.
Limited by Shares:
In a limited-by-shares company, the Memorandum of Association (MOA) limits the company members’ liability. They are only liable for unpaid amounts of money which remain to be paid on their respective holdings thereof. A member’s proportion of equity measured by the shares they own represents his or her ownership interest in the organisation. India has about 1.6 million companies that were limited by shares.
Limited by Guarantee:
A company limited by guarantee is one in which the liability of its members is limited to the amount they have agreed to contribute to the company’s assets. Here, the member’s liability is limited under the company’s Memorandum of Association. The MOC states that if the company is wound up, members promise to pay the amount of what their guarantee extends. Hence, the percentage of their liability depends on the amount guaranteed by them.
Unlimited Company:
An unlimited company refers to a company whose members have no liability limits. In case a debt arises, the members’ liability is unlimited and extends to his/her personal assets. Usually, businesses never prefer incorporating this type of company. Reports suggest that about 295 companies fell under the unlimited liability category in 2024.
Types of companies basis control
Here are some companies that are classified depending on control and ownership structure:
Holding Company:
A holding company is a parent company for its subsidiary company, either partially or entirely, and holds the majority of voting rights for it. The company controls the other company’s policies, assets, and management, although it does not engage in the latter’s daily activities.
Subsidiary Company:
When a holding company owns another company partially or wholly, it is referred to as a subsidiary company. A holding company has control over 50% of its subsidiary’s voting powers and controls the composition of all the members of the board of directors. In case of possessing 100% voting powers, the subsidiary is identified as the Wholly Owned Subsidiary (WOS) of the holding/parent company.
Company Types Based on Listing
A company’s listing status significantly impacts its operations, ability to acquire funds and compliance requirements. All companies can be grouped into listed and unlisted depending on their access to capital. All listed companies should be public entities, while vice versa is not always the case. Unlisted companies could either be private limited companies or public.
Listed Company:
A listed company is registered on different recognised stock exchanges within or outside India. Shares of such companies are freely traded on the stock exchanges and have to comply with the rules of the Securities and Exchange Board of India (SEBI).
When a company wishes to list its shares on stock exchanges, it should issue a prospectus to the general public so that they can subscribe to its debentures or shares. A company can list its shares through its first public offer (IPO), while an already listed company can use an additional public offer (FPO) to achieve the same objective.
Unlisted Company:
A private company is one that is not listed on a stock exchange, so it is privately owned. This is why it cannot raise funds and become capital investors. By being unlisted, these firms can exercise greater control over their operations.
The Bottom Line
Corporate law is complex, and wrong decisions on the structure of a business can have far-reaching consequences. Therefore, if entrepreneurs are planning on establishing their company, they should seek professional advice besides the aforementioned guide. This being said, consulting an experienced business advisor or corporate lawyer can assist these businesses in making a meaningful choice about the most suitable company type that matches their needs and expected outcomes.
