How many members are required to form limited companies?

It covers the classification of companies based on incorporation (Chartered Company, Statutory Company and Registered Company), control (Government Company, Holding Company, Subsidiary Company and Associate Company) and motive (Non-profit Company, Service Company and Producer Company). Lastly, it covers the meaning, features and formation of Private Company, Public Company and One Person Company on the basis of the number of employees.
Estimated Reading Time: 11 minutes

Introduction

It is a fact that every human being is unique. Just like inside the body of a living organism, all the organs uniquely function with a common object to live; similarly, a business requires different individuals to perform specific tasks in order to achieve a common outcome. When this formation of the group is lawfully done, fulfilling all the legal requirements, it is defined as a ‘company.’Section 2(20) of Companies Act, 2013 provides that the term ‘company’ means any company incorporated under the said Act or any previous company law of India. It is commonly asked How many members are required to form limited companies?

In a ‘limited company,’ the shareholders become liable to the debts only up to the extent of their investment. So, if three individuals are shareholders with 50%, 30%and 20% respectively, then the amount of debt against the company would be paid by them in the same proportion. In other words, a limited company protects the personal assets of the shareholders in case the operating company is sued or has debts to pay.[1]

Background

Initially, to govern the formation and function of companies in India, the Companies Act 1956 was enacted by the parliament. Then it got repealed to form the Companies Act 2013, which is administered by the Ministry of Corporate Affairs (MCA).

Classification of companies

There are many different kinds of companies in existence. To find the differences and similarities, these can be classified into the following categories;

Based on incorporation:

When the members of business go through the legal process and form a company, it is termed as incorporation. Section 7 of the Companies Act 2013 provides the process by which incorporation is done. There are three ways in which a company can be incorporated. They are as follows;[2]

  • Chartered Company: This type of company forms by a charter, which means an approval to exercise authority or specified rights, passed by a king or a queen, such as the East India Company, the Bank of Japan and the Bank of England. SinceIndia is neither a colony of other countries nor has a monarchical system, the Companies Act 2013 does not include provisions for a chartered company.
  • Statutory Company: It requires an Act passed by the parliament for its formation. For instance, Life Insurance Corporation of India was formed based on the LIC Act 1956, and the Reserve Bank of India was formed based on RBI Act 1934.
  •  Registered Company: According to section 2(20) of the Companies Act 2013, any company which is registered either under Companies Act 1956 or under Companies Act 2013, is called a ‘registered company.’ Further, it provides that any company registered in a Companies Act, which was enacted before 1956, is also considered a registered company.

Based on control

  • Government Company:Section 2(45) of the Companies Act, 2013 provides that if the government is holding at least 51% share of a company, it becomes a government company. The government, here, includes either central or state or both. Even state governments of two different states owning a share of the company, which sums to 51% or above, is also considered a government company. The section also provides that any subsidiary company of government can also be a part of the 51% share to make it a government company.
  • Holding Company:Section 2(46) of the Companies Act, 2013 defines a holding company. When one company becomes a holder of more than 50% shares of another company, the former is called the holding company, and the latter is known asthe subsidiary company. The purpose of a holding company is to own an interest in other businesses.It does not produce any goods or services of its own but is only concerned with ownership to form a corporate group. Besides, it provides additional layers to protect the owners from loss. Today, most of the lavish companies in the world are playing the role of a holding company. For instance, companies like Bajaj Holdings, Godrej Industries, and Grasim Holdings are some of the prominent holding companies in India.
  •  Subsidiary Company:It is also known as a daughter companythat is owned or controlled by a holding or parent company. It can be a corporation, company, or a Limited Liability Company (LLC). If it is 100% owned by a parent or holding company, then it is called a wholly-owned subsidiary company. Section 2(87) of the Companies Act 2013 definesa subsidiary company. It provides that a subsidiary company is a company for which there is a holding company that;[3]
  • controls thecomposition of Board of Directors (BOD), or
  • controls or exercises more than half of its share capital by its own decisions or by a combined decision,including all the subsidiary companies.

A company can also be considered deemed to be a subsidiary company. For instance, if company B is a subsidiary of company A, and company C is a subsidiary of company B. In that case, company C will be deemed to be a subsidiary of company A. The companies like Oral B, Gillette, Head & Shoulders, Pampers, Tide, Olay and Vicks are some of the subsidiary companies of Procter and Gamble (PG), which is a holding company.

  • Associate Company: It is defined under section 2(6) of Companies Act, 2013.It has also been amended under the Companies (Amendment) Act 2017. An associate company is a company which gets ‘significantly influenced’ by any other companywithout becoming its subsidiary butincludes a joint venture. The significant influence may include;
  • Control of at least 20% voting power, or
  • Control or participation in decisions of business agreement.

For instance, if company A has a significant influence on company B, then company B becomes an associate of company A. Since company B is not the subsidiary of company A but an associate, so company A canhave a control of at least 20% up to 50% voting power in company B.

Based on motive

  • Non-ProfitCompany:It is provided under section 8 of the Companies Act, 2013, hence, it known also known as ‘Section 8 Company.’The motive behind forming a non-profit company is to promote education, social welfare, religion, charity, protection of environment or any other related thing without generating profit for any other purpose.It does not require a minimum paidup share capital.The members have a limited liability in this form of company. Moreover, before forming a non-profit company, it is required to take a license from the government for its functioning. Due to its charitable objectives, it is entitled to several privileges such as tax exemptions.[4]
  • Service Company: in this type of company, the revenue is generated by providing services to people. They do not require to prepare inventories since they do not sell physical products. The income statement is used to record service income. For instance, Bharti Airtel Limited, Uber, Tata Consultancy Services and HDFC Bank are some of the prominent service companies in India.
  • Producer Company: this kind of companies are engaged in producing things and obtaining revenue by selling it. It has to be registered under Companies Act, 2013. There are nine objectives of a producer company; harvesting, procurement, grading, pooling, handling, marketing, selling, importing and exporting. It is further classified into;[5]
  • Production business: there are three functions involved in this type of business; production, procurement and manufacture of the goods produced.
  • Marketing business: it is a practise of selling their products to other firms and companies by promoting it.
  • Financial business: it is a business of fund provider to other companies by investing, purchasing or lending money.
  • Infrastructure business: it provides infrastructure, such as electricity, water, land and irrigation resources, to the production business.
  • Technical services business: it provides technical assistance, such as training and education or conducting a research and survey, to the producers.

Private Company

Meaning:

When a group of individuals come together to form a company whose shares are not traded on public stock exchange, instead owned privately, is considered as a ‘private company.’It is recognised by the Companies Act 2013 and defined under section2(68) of the Act. It is divided into;

  1. Sole Proprietorship: Only one person is the owner and manager of the entire business. He has the unlimited personal liability on the debts incurred by thatbusiness; hence, all the obligations, liabilities and assets are his responsibility. He may run the business on his own or appoint an employee for the same.
  2. Partnership: When two or more individuals decide to own and manage a business with the motive to earn profit, it is called partnership. All the partners in the business have the unlimited personal liability. Partnership is further classified into;[6]
  3. General Partnership
  4. Limited Partnership
  5. Limited Liability Partnership
  6. Corporation: It is a legal entity, apart from its owners, having similar rights and liability of a person. It can enter into a contract, sue, be sued and pay taxes. It can be a not-for-profit or for-profit business entity. A corporation is owned by its shareholders who elect a Board of Directors (BOD) to look after the operations of the business.

Companies like Reliance Industries Limited, Tata Consultancies Services and Wipro Limited are some of the prominent private companies of India.

Characteristics:[7]

  1. According to the Companies Act 2013, it is required to have at least 2 and not more than 200 members to form a private company.
  2. All the members have a limited liability.
  3. It is mandatory for all the private companies to use “Private Limited” after the name of the company.
  4. Private companies have a perpetual succession, which means that its existence never comes to an end, even in a situation of insolvency, bankruptcy or death of any member of the company.
  5. It is not mandatory to keep an index of its members.
  6. There is a requirement of minimum two directors for its operations to take place.
  7. Initially, it was required to have a minimum of Rs. 1 Lakh as a paid-up share capital, however, it is now required to have a minimum paid-up share capital as prescribed from time to time.
  8. It is not mandatory to issue a prospectus, which is a detailed statement about the affairs of the company for public.

Formation:

With an increase in variety of businesses, it has become easy to form a private company in India. It takes approximately 35 days for its incorporation. The following are the steps;[8]

  1. To obtain a Director’s Identification Number (DIN) and Digital Signature Certificate (DSC). It includes address proof, Aadhaar card, PAN card, photo, email id and phone number.
  2. Approval of the company’s name by the Registrar of Companies (ROC).
  3. To submit two important documents; memorandum and articles of association, to ROC.
  4. To forms are to filled; e-Form No. 18 and e-Form No. 32, as prescribed under the company law.
  5. To fill statutory declaration in e-Form No. 1, as provided under section 33(2) of the Companies Act.
  6. To submit few miscellaneous documents, including the declaration of compliance with a stamp, a notice of the situation of the registered office of the company, particulars of directors, managers or secretary, and the ROC’s letter approving the name of the company, along with memorandum and articles of association.
  7. To pay the registration fee as prescribed under schedule X of the Companies Act, 1956.
  8. The issuance of certificate of incorporation.

Public Company

Meaning:

It is defined under section 2(71) of Companies Act 2013. It is a legal entity whose stocks are owned by general public as theshares are freely traded on a stock exchange, unlike private companies.The value of a public company depends on its daily trading. The companies like Hindustan Petroleum Corporation Limited, Coal India Limited and Steel Authority of India Limited are some of the largest public companies in India.

Characteristics:[9]

  1. It is owned by two or more shareholders who buy the shares of the company.
  2. It is required to maintain an index of the names of members of the company.
  3. Paid up capital of Rs. 5 lakhs are required as prescribed under Companies Act 2013.
  4. It has a perpetual succession like private companies.
  5. It requires at least seven shareholder, three directors and one secretory to form a public company.
  6. It is mandatory to end the company’s name with “Limited.”
  7. All the members have a limited liability, which means that if debt is incurred by the company, each member is only liable to the extent they invested.
  8. It is mandatory to issue a prospectus of a public company, unlike private companies.
  9. It is required to abide by the laws and regulation as provided by the Companies Act, 2013.

Formation:[10]

  1. To obtain Digital Signature Certificate of any one director of the company while submitting address proof and identity proof of the same.
  2. To obtain Director Identification Number (DIN) from the DIN authority.
  3. To search for name avaibility and give an application for approval of the company’s name. At least six options for the name is to be given to the Registrar of Company (ROC).
  4. To submit the Memorandum and Articles of Association of the company to the ROC and fill the Form DIR – 12, Form INC – 22 and Form INC – 7.
  5. To pay the registration fee.
  6. After successfully doing all the above steps, the certificate of commencement of business and incorporation is obtained.

One Person Company

Meaning:

It was recently recognised by the Companies Act, 2013 because of the reason that sole proprietorship and partnership lacked the protection of limited personal liability. It is defined under section 2(62) of the Act. A person company, as the name suggests, is a company having only one person as its member and shareholder. R. H. Agri Industries, Agrifirst Farm industries, and SreeNeelakanteswara Seed are some of the One Person Companies (OPC) in India.

Characteristics:[11]

  1. According to section 3(1)(c) of Companies Act, 2013, any person can form one-person company as long as the purpose behind it is lawful. It has been categorised as a private company.
  2. The person forming the company has to decide a nominee while registration.
  3. If the sole member dies, the nominee can either choose or reject to take over the company. There is no concept of perpetual succession in this form of company.
  4. There has to be at least one director of the company and there can be a maximum of fifteen directors.
  5. There is no requirement of a minimum paid-up share capital.

Formation:

  1. To apply obtain Digital Signature Certificate (DSC) of any one director of the company.
  2. To obtain Director Identification Number (DIN).
  3. To decide a name for the company and check it availability. The company’s name has to end with “(OPC) Private Limited.”
  4. To submit the names for its approval by sending an application either toForm SPICe 32 or to the Ministry of Corporate Affairs (MCA).
  5. To submit Memorandum and Articles of Association to the Registrar of Company (ROC).
  6. The consent of the nominee in Form INC – 3 along with his Aadhaar and PAN card.
  7. Proof of the registered office for the company along with proof of its ownership with NOC of the owner.
  8. To submit the affidavit of the director of the company.
  9. All the above-mentioned documents to be uploaded on the MCA website for its approval.
  10. Issuance of Certificate of Incorporation by ROC. After that, the company would be legally formed and can commence its business.

Conclusion

There is a huge variety of companies in existence globally. Each of them has it owns advantages and disadvantages.Depending on the need and the number of members, a company of a particular type can be formed. The reason behind classification of companies based on various factors is to govern and protect them efficiently. It is equally important for the members of any company to be aware about the rights, liabilities and obligations. Otherwise, it is very easy to get scammed or fraud in today’s time.

Also read Privatization of Public Companies in India


[1]Elizabeth Layne, The Difference Between Inc. & Ltd. & Co., Chron (Jan. 29, 2019), https://smallbusiness.chron.com/difference-between-inc-ltd-co-38627.html.

[2] K. Agrawal, Companies Types, Your Article Library (July 12, 2012), https://www.yourarticlelibrary.com/company/companies-types-5-types-of-companies-discussed/46810.

[3]Mohammed Julfekar Haider, Types of Companies, India Study Channel (Aug. 22, 2010), https://www.indiastudychannel.com/resources/124889-Types-Companies.aspx.

[4]Akansha Dhingra, Section 8 company- a Legal form of non-profit organisation, Your Story (June 23, 2018), https://yourstory.com/mystory/87fa6d9afe-section-8-company-leg

[5]Athulya, What Is A Producer Company? – Formation, Benefits & Registration, Vakil Search (May 16, 2020), https://vakilsearch.com/advice/producer-companies-companies-act-2013/.

[6]Elizabeth Wasserman, How to Structure a Partnership, Inc., https://www.inc.com/guides/structuring-partnerships.html.

[7]Ricky, Features of a Private Company, Registrations India (May 10, 2016), https://registrationsindia.com/learning-hub/features-private-limited-company/.

[8]Narendra Kumar, 5 Steps for Forming a Private Limited Company in India, Enter Slice (May 20, 2017), https://enterslice.com/learning/forming-a-private-limited-company/.

[9] Akshat Singh, Features of Public Limited Company, Provenience (July 26, 2019), https://provenience.in/blog/features-of-public-limited-company/.

[10] Sagar Gupta, Procedure for Formation of Private & Public Company in India, Tax Guru (Jan. 28, 2015), https://taxguru.in/company-law/procedure-formation-private-public-company-india.html.

[11]Anagha, Characteristic features of One Person Company Comparison of OPC and sole proprietorship, Legal Service India, http://www.legalserviceindia.com/legal/article-926-characteristic-features-of-one-person-company-comparison-of-opc-and-sole-proprietorship.html.

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