Updated : September 24, 2024Types and Classification of Company Under Companies Act, 2013
Overview :Company, as the name implies, is a business structure where individuals and parties mutually agree to pool their resources and work towards achieving common business goals and objectives. Companies are regulated as per the provisions specified under the Companies Act of 2013, also offering legal framework for formation of various types of companies, their incorporation, management, compliances and closures, etc. The blog sheds light on types and classification of Company under Companies Act, 2013.
A company is one of the most popular and common business structures opted by entrepreneurs in India and even all over the world. It enables individual and non-individual entities to come together, pool their resources, and begin business operations to achieve common goals and objectives. In India, companies are regulated under the umbrella law- the Companies Act of 2013, which provides a legal framework for the formation of various types of Companies, their incorporation, management, compliances, closures, and so on.
The goal is to regulate all aspects of companies, ensuring their transparency, accountability, and fair trade practices in the country. This post covers the classification and types of company in company law! Get to know more about different types and classifications of companies to make informed decisions on choosing the right type of company structure described in company law for your business.
Factors Affecting Company Classification under the Companies Act
Company Classification under the Companies Act depends upon various specified factors. These factors help differentiate companies as per their size, ownership structure, operations, and legal requirements. Diving deeper into the types and classifications of a company is important as it provides clarity on the obligations as well as benefits associated with each classification. Let’s explore the key factors that influence the classification of companies in Company law:
Size of the Company: The size of a company, which is often measured by its turnover, capital investment, or number of employees, plays a significant role in its classification. The Companies Act typically defines thresholds or criteria for categorizing companies as small and large. The classification of a company based on size also determines the extent of regulatory requirements and compliance obligations imposed on the company.
Ownership & Management Structure: The ownership structure of a company is another vital factor that affects its classification. Companies can be classified as Private Limited Companies, Public Limited Companies, or One Person Companies. Each classification has its own set of rules governing ownership, shareholder rights, and decision-making processes.
Intended Business Activity: The nature of business activity undertaken by a company also influences its classification. Companies that are active in specific sectors such as banking, insurance, or other financial services can be classified as banking and non-banking financial activities. On the other hand, there are also kind of companies that perform non-profit activities as well. The Companies Act sets different regulatory frameworks for these types of companies.
Country of Origin: Companies that operate in India but are incorporated beyond its territorial borders are called foreign companies and are subject to different laws and regulations under the Companies Act. Foreign companies are typically needed to adhere to stricter registration, reporting, and compliance requirements to operate legally within India.
Liability of Owners: The extent of liability assumed by the company’s owners or shareholders is an important factor for the classification of companies too. Companies can be classified as limited liability or unlimited liability as per the personal liability of their owners.
Different Types of Company & their Classification Under Companies Act
Company Classification under the Companies Act, 2013 depends on a number of factors discussed above, mainly size, ownership structure, business activity, liability, and geographical scope. Let’s explain the different classification and specific types of companies in company law thoroughly.
| S.No. | Basis of Classification | Types and Classification of Companies |
|---|---|---|
| 1. | Size |
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| 2. | Ownership & Management |
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| 3. | Intended Business Activity |
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| 4. | Country of Origin |
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| 5. | Liability of Shareholders |
|
Company Types Based on Size:
Small Company: A small company is defined under Section 2(85) of the Companies Act, 2013. It meets the following criteria:
- Paid-up share capital must not exceed INR 4 crores.
- Turnover in the previous financial year must not exceed INR 40 crores.
- Must not be incorporated or operational as a Public Company, Section 8 Company, Holding Company, Subsidiary Company, or any other company notified under the Companies Act.
A small company enjoys lesser or streamlined compliance benefits under the Companies Act of 2013, offering a more flexible operational framework. With the privilege of conducting two board meetings annually instead of four, a small company experiences a lighter administrative burden. Moreover, the alleviation of mandatory cash flow declaration at year-end provides financial flexibility. Notably, the Director’s Remuneration Statement becomes signable by either the Company Secretary or Director, simplifying the approval process.
Furthermore, small companies are exempt from the mandatory rotation of auditors under Section 139(2), and detailed information in the Auditor’s Report is not required. While Sections 92(5), 117(2), and 137(3) compliance is obligatory, small companies benefit from a more lenient regulatory approach.
- Non-small Company: Non-small companies are those that do not meet the criteria to be classified as small companies. They are subject to regular compliance requirements and financial reporting obligations as prescribed by the Companies Act.
Company Types Based on Ownership & Management:
- Private Company: A private company, defined under Section 2(68) of the Companies Act 2013, comprises the following features & characteristics:
- Restricts the right to transfer its shares.
- Has a minimum 2 and maximum 200 members (excluding employees and ex-employees who are also shareholders).
- Prohibits any invitation to the public to subscribe to its shares or debentures.
- Provides limited liability benefits to the owners.
- Public Company: A Public Company, defined under Section 2(71) of the Companies Act 2013, is characterized by:
- No restrictions on the transferability of its shares.
- Having a minimum of seven members (with no upper limit on the number of members).
- Being allowed to raise capital by issuing shares or debentures to the public.
- Public limited companies have the advantage of raising funds through public offerings but are subject to more extensive compliance requirements and regulatory scrutiny.
- One Person Company (OPC): Introduced by the Companies Act 2013, OPC is a type of private limited company that can be incorporated with only one shareholder. It provides a separate legal identity and limited liability to the sole owner, combining the benefits of a private limited company with the ease of operations for single entrepreneurs.
These are three major types/classifications of company in Company law. Depending upon your ownership and management strength, you can opt for any of the above types of companies for your business entity. Different types of companies have different features, compliance requirements and benefits.
Company Types Based on Business Activity:
Now that we know where the Company Registration Number is found, let us navigate through the process of how to find Company Registration Number in India. To check the company registration number check online, you must be able to access the MCA portal online. The portal contains the services of Master Data which enables you to check the registration number. Also, you must possess the CIN or Corporate Identification Number of the Company whose registration number you are supposed to check and verify. Once these are available, you can begin the process of company registration number check online. Given below is a Stepwise Guide of how to do so.
- Financial & NBFC Company: Financial & NBFC companies area of operation consists of the financial sector and provide financial services such as deposits, insurance, credit and so on. These companies are regulated by specific legislation such as the Reserve Bank of India Act, Insurance Act, or relevant financial regulatory authorities. Financial companies play a crucial role in the economy by providing financial services, managing risk, and facilitating economic growth.
- Profit-Earning Company: Profit-earning companies are formed with the primary objective of generating profits for their shareholders or owners.These companies engage in various business activities, such as manufacturing, trading, services, or technology.
- They operate with the intention of earning revenues that exceed their expenses and ultimately aim to distribute profits among the shareholders or reinvest in business growth. Profit-earning companies are subject to the general provisions and regulations outlined in the Companies Act 2013, including compliance requirements, financial reporting, and corporate governance obligations.
- Non-Profit Company: Non-profit companies are formed for promoting art, science, commerce, religion, charity, sports, education, research, or any other social objective. These companies are registered under Section 8 of the Companies Act 2013 and must apply their profits solely for promoting their objectives.
Non-profit companies differ from profit-earning companies as they prioritize social welfare and do not distribute profits among their members. Instead, any surplus generated is utilized for the company’s social objectives. Non-profit companies enjoy certain exemptions under the Companies Act, but are subject to strict regulations related to the utilization of funds and compliance with the company’s objectives.
Types of Companies Based on Country of Origin:
- Domestic Company: A domestic company is incorporated and registered in India and operates within the country’s jurisdiction. It is subject to the regulations and compliance requirements of the Companies Act 2013.
- Foreign Company: A foreign company, as per Section 2(42) of the Companies Act 2013, refers to any company that is incorporated outside India but also holds a place of business in India. Foreign companies operating in India are required to comply with specific registration, reporting, and compliance obligations specified under the Companies Act.
Company Types Based on Liability of Shareholders:
- Limited Company: As the name applies, limited companies are companies which restrict the liabilities of their shareholders. It can also be further classified into companies limited by shares and companies limited by guarantee.
- Limited by Shares: These companies’ liability is limited to the extent of the unpaid amount on the shares held by the shareholders. Most private and public limited companies fall under this category.
- Limited by Guarantee: These companies do not have share capital. The liability of its members is limited to the amount they guarantee to pay in case the company is wound up.
- Unlimited Company: In an unlimited company, the liability of the members is not limited. The members are personally liable for paying-off the company’s debts and obligations. Unlimited companies are relatively uncommon and are often formed for specific purposes or in niche sectors.
Conclusion
Understanding the types and Classification of companies under the Companies Act 2013 in India is crucial for entrepreneurs, investors, and professionals. The factors influencing classification of Company, such as size, ownership structure, business activity, liability, and geographical scope, provide insights into the diverse landscape of companies. By navigating through the benefits and fulfilling the obligations of each type of company, entrepreneurs can contribute to a vibrant and sustainable business ecosystem in India.
