Overview of Different Type of Companies

INTRODUCTION

A Company is a body corporate separate from its members or promoters. It has separate legal existence due to legal fiction which can only be ended by law. The Companies Act, 2013 (Hereinafter referred as, “The Act”) defines “Company” under Section 2(20) as a company incorporated under the said Act or under any previous company law. Companies can be classified on the basis of number of its members, liability, ownership/ control, purpose and/or other types. This article gives the overview of the three major types of companies on the basis of number of members which may be registered under the Act.

TYPES OF COMPANIES : AN OVERVIIEW

• Private Companies

The Act defines “Private Company”[1] as company which restricts the transfer of shares & prohibits public at large from subscribing its securities under its articles of association. Further, it also limits the number of members to two-hundred (except for One Person Company), excluding present & former employees, who are also members. The Act also gives an overview that in case of private company, more than two persons who own shares jointly shall be treated as a single member.

Characteristics of a private company

• Limitation on membership: minimum two members are required to start a private company. Further, cap of two-hundred members is imposed on its membership by the statute. The Act also provides that if two or members are joint owners of shares, then they will be treated as single member. In addition to this, the present & future employees who are also shareholders are not considered as members.

• Prohibition on public subscription: private companies cannot raise capital by issuing prospectus & inviting public to subscribe its securities. It can raise its capital by way of private placement,

• Number of directors: A private company must have atleast two directors & is allowed to have maximum fifteen directors.[2]

• Limited Liability: members liability of private company is limited. But in general, they have limited liability i.e., shareholders of private company are not personally liable to honor payments or liabilities incurred by the Company.

• Use of term “Pvt. Limited”: Private companies are required to use “private limited.”[3] as suffix because it describes the nature & constitution of organization.

• Restrictions on share transferability: The Article of association of a private company prescribes for restriction on free transfer of shares. But this restriction is subject to exception viz. when shares are transferred to representatives of shareholder or when the shares are devolved on the heirs in the event of death of shareholder etc.

• Perpetual Succession & Separate Legal Entity: It essentially is a company, registered under the Act, hence, it enjoys all the characteristics of a corporate body i.e., perpetual succession, separate legal existence, capacity to sue & be sued, separate property etc.

Advantages of a Private Company

• No minimum capital: The Act provided for one Lakh rupees as minimum capital requirement to form a private company, but this limit has been done away with by amendment[4] in the Act. Hence, there is no limit on paid-up capital but the minimum authorized capital requirement is based on the name of the entity.

• Limited Liability: The liability of members is limited thus their personal assets cannot be used to satisfy the liabilities incurred by the Company.

• Less complexity & confusion: As there is limit on membership & it is generally constituted by investors, promoters or management, there is certain degree of liberty in transfer of shares, it also reduces complexity & confusion.

• Exemptions available to private company: Certain exemptions available to private company are:

1. Related-party transactions: The Act has provided overview for special definition for “Related Party” in case of private company. It states that the “exempted entities” like holding company, subsidiary company, associate company & subsidiaries of holding company will not be considered as related party & thus, compliance of Section 188 of the Act is not required for private company.

• Kinds of share capital: The private companies are free to issue any kind of shares (Equity & preferential) subject to their memorandum or articles of Association. It can also issue special shares with special rights to its members but only in accordance to its articles & memorandum.

• Rights issue offer period: The time limit[5] provided for right issue can be reduced if atleast 90% of the shareholders have given their consent in writing or in electronic mode.

• Employee stock option: Private company can issue ESOP after passing a general resolution for the same unlike a public company which requires special resolution to do the same.

• Power to purchase own shares: Exception is given toPrivate companies to subscribe its own securities provided they fulfil the following criteria mentioned under Section 67 of the Act:
• No body corporate should be investor in the company;
• The borrowings from banks, FI’s or body corporate shall be less than twice of its pai-up share capital or fifty crore rupees whichever is less;
• There should be no default in repayment of any such borrowings.

• Loans to directors: The overview of act provides private company is also entitled to advance loans, guarantee or security to director if it fulfils the criteria provided above.

• Board Resolution filings:  Overview of Act also provides that Private companies are exempted from filing resolutions to Registrar of Company under section 179(3) of the Act.

• Eligibility of Auditors: In case ofthe private company with share capital less than 100 Crore rupees, the eligibility requirements for Auditor provided under section 141(3)(g) of the Act are not mandatory to be followed.

• Other exemptions: Certain other relaxations or privileges pertaining to meetings, proxies, quorum, appointment & remuneration of management, Board powers etc. are also provided to private companies.

Disadvantages of Private Company

• Limited membership: The limit on membership further limits the scope of investment in the company as a prescribed number of shareholders can only bring a limited investment, this may reflect on the availability of resources to the company.

• No Public subscription allowed: Public is not authorised to subscribe for shares of private company. It does not need to list its shares on stock exchange thus, regular valuation of investments is not available with shareholders.

• Restriction on transferability of shares: It is not easy for members to leave a private company. The Articles of the Company impose certain restrictions on its members with regard to their subscription.

• Registration procedure: It involves much more cost & time as compared to proprietorship or partnership. Even after registration it has to undergo regular statutory compliances & other requirements as prescribed.

• Public Companies: An Overview

Public Company means that company which is not a private company & whose shares are available for subscription to public at large. In addition to this, a subsidiary of a company which is not a private company, is also deemed as public company, even if the articles of subsidiary company provide otherwise. [6] Every Public company shall have minimum three directors & maximum fifteen directors in its board.[7]

Characteristics of public company: An Overview

• Number of directors: Minimum number of directors required in a public company are three & maximum limit is fifteen.[8]

• Limited liability: personal assets of its members is not used to satisfy the debts or liabilities incurred by the Company itself.

• Use of “limited” as suffix: A public company has to use “limited” as a suffix to its name, which represents the limited liability of its members.[9]

• Transferable shares: The articles of the company do not prescribe any special restrictions on the free transfer of shares of the company. Further, its securities are open for public Subscription & for this Public company has to register itself with a recognized stock exchange.

• No-minimum paid-up capital: The Act earlier provided for the limit of five lakh rupees towards paid-up capital but this limit has been done away with amendment[10] in the Act.

• Membership: Minimum members required to start a Public Company is seven & there is no upper limit on the same. Hence, there can be as many members as required to accommodate the capital.

• Issuance of shares: The company can issue its shares by way of Public issue, rights issue, bonus issue, preferential issue or private placement.

Advantages of a Public Company: An Overview

1. Easy capital availability: A public company has a scope of raising much larger capital base as compared to private company because it can issue its security to Public through recognised stock exchanges.

• Transferability of shares: a crucial characteristic of public company is its shares are freely transferable.[11]Hence, shareholders are free from cumbersome procedure of private company while transferring their shares.

• Availability of financial information: Stocks of public company are listed in stock exchange this enables potential investors to analyse the available of financial reports. This also helps in building creditworthiness & attracting large base of diversified investors.

• Limited liability: The public company members generally have limited liability unless otherwise prescribed i.e., their personal assets cannot used to satisfy the liabilities of Company.

Disadvantages of a Public Company: An Overview

• Compliance complexity: Public Company has to undergo a complex & painstakingly long procedure to get registered. And even after its registration, it has to make periodical disclosures & compliance fulfilment as prescribed by the statute.

• Ownership & control issues: Due to diluted ownershipit is much harder to control who is a shareholder of the company, and who the directors are ultimately accountable to. Thus, there is a possibility that the original owner & directors lose their control over the company.

• Stock market vulnerability: Availability of every financial detail in market makes it difficult for directors & members to control its affairs. This may put company in a vulnerable position in long run.

• One Person Company (OPC)

One person company is a company which has only one person as its member.[12] Essentially OPC is a company that has only one shareholder as its member. This kind of company is generally created when there is only one promoter of the company. There is a distinction between OPC & sole-proprietorship. OPC is a separate legal entity its members have limited liability while a sole-proprietorship business & its owner is single entity & has unlimited liability.

Characteristics of OPC : An Overview

• Private Company with single member: Section 3(1)(c) states that an OPC is a private company & cannot be incorporated as public company with a single person as its member. Its member can only be a natural person who is a citizen as well as resident of India. A person can be a member of only one OPC. If that person by virtue of being nominee becomes member of another OPC, then within one hundred eighty days, he/she has to withdraw membership from either of the OPCs.

• Nominee: While registering an OPC it is important for company to mention a nominee. The company has to file consent form of nominee in the prescribed format. The nominee must be a major, Indian citizen and Indian resident. A minor cannot become a member or nominee of an OPC or acquire shares in another OPC. Nominee can withdraw his name after providing prescribed notice.

• Perpetual Succession: Its succession is based on acceptance or rejection of membership by Nominee in case of death of previous member. Hence, unlike other types of companies there is no concept of perpetual succession for OPC.

• Limit on number of directors: OPCs are authorized to appoint minimum one director & maximum fifteen directors.

• Paid-up share capital: No paid-up share capital has been prescribed for OPC by the statute but in case the paid-up share capital surpasses fifty lakh rupees or its average turnover in immediately preceding three consecutive financial years exceeds two crore rupees, then it is required to compulsorily convert itself into a public company.

• Conversion to Section 8 Company: OPC is not authorized to be converted into section 8 company. Further it cannot be incorporated as holding or subsidiary company.

Advantages of OPC : An Overview

1. Compliance complexity: An OPC is a private limited company. Hence, it is required to comply with compliance provisions of private company but it has been granted several exemptions & thus, lesser compliance burden is placed on OPC.

• Organized form of sole proprietorship: It provides an organized platform to small & medium enterprises. This open various finance raising possibilities for the OPC. Further, sole-proprietors have unlimited liability but OPC member has limited liability which reduces burden on proprietors.

• Legal status of body corporate: Various benefits of body corporateaccompany OPC like perpetual succession, separate ownership, separate property, right to sue & be sued etc. Corporate body provides a sense of confidence among stakeholders. It is easy to get loans if a business is incorporated in accordance to the statute.

• Easy control & management: Certain exemptions with regard to board or member meetings, quorum, minutes etc. makes it a favourable form of Company. Due to single member, it is easy to control & manage the affairs of the Company.

Disadvantages of OPC: An Overview

• Restriction on nature of business activities: It cannot carry out Non – Banking Financial Investment (NBFI) activities including investment in securities of anybody corporates & cannot be incorporated as section 8 or a Public Company.

• Compulsory conversion: If the paid-up share capital surpasses fifty lakh rupees or its average turnover in immediately preceding three consecutive financial years exceeds two crore rupees, then OPC is required to compulsorily convert itself into a public company.

• Limited members: Limited number of members puts a limit on ways of raising capital through public or any other mode except loans or advances from financial Institutions. This puts a halt on the adequate cumulation of resources.

• Mandate to appoint nominee: It is mandatory to appoint nominee. An OPC cannot be registered unless a consent form from Nominee has been submitted while registration process, hence, this imposes a burden on business owners to find an eligible nominee.

• NRIs or PIOs not allowed to incorporate OPC: The Act imposes certain limitations on the eligibility of member viz. a natural person who is a citizen as well as resident of India. This does not provide an option to NRIs or PIOs to incorporate an OPC in India.

• Chances of overlapping ownership & control: There is a blurred line between ownership & management of OPC. This may pose challenges to OPCs efficient management.

CONCLUSION

In conclusion it can be said that every kind of Company be it Public, private or One Person Company has both limitations & advantages. Hence, it primarily depends on the nature of business, number of members & the mode of issuance of securities which needs to be considered while considering the option of incorporating a company. All the features, tax & statutory compliances need to be thoroughly analyzed while choosing the form of Company. The above discussed overview of companies lays that companies can be further divided into various other types viz. limited by shares, limited by guarantee, holding or subsidiary company, government company, foreign company as may be prescribed by the Act.

References:

[1] The Companies Act, 2013, §2(68).

[2] The Companies Act, 2013 §149(1).

[3] The Companies Act, 2013, §4(1)(a).

[4] The Companies (Amendment) Act, 2015.

[5] The Companies Act, 2013 §62.

[6] The Companies Act, 2013, §2(71).

[7] The Companies Act, 2013, §149(1).

[8] Supra Note 2.

[9] Supra Note 3.

[10] Supra Note 4.

[11] The Companies Act, 2013, §58(2).

[12] The Companies Act, 2013, §2(62).