Types of Companies under the Indian Company Law

The present article deals with the concept of company as per Indian Law. The article also deals with the characteristics of a company. It further deals with different types of company.
Estimated Reading Time: 12 minutes

Introduction

When we consider a business, it is only a progression of transactions, anyway, a company is much more than that. It isn’t just about a transaction or a well-performed and executed contract. But it is a separate distinct entity. What’s more, it has a pool of individuals who invest into it and enjoy its products and services, thus it is working as a lot bigger figure than a minor transaction or a contract.

Company Law in India

To guarantee the smooth working of a business undertaking, there were laws framed to maintain the straightforwardness and responsibility towards its investors and was called Company Laws. It gives an outline of how a company must function as a lawful element and how it must be overseen.

The Companies Act, 2013(hereinafter referred as ‘the Act’) has replaced The Companies Act, 1956. The Act was enacted on 29 August 2013 and was enforced on 12 September 2013 which notified only certain provisions of the Act. The Act contains 29 Chapters divided into 470 Sections and includes 7 schedules. The law provides the guidelines in which a company must be managed and formed. A company is a legal entity which enters into transactions with other parties regularly due to which protecting their interest as well as the company’s interest is a necessity. A company comes into existence when it is registered with the registrar of companies.

The Companies Act, 2013

The Act is shaped to consolidate and amend the laws identified with the companies and it extends to entire of India. It similarly applies to every one of the companies that are consolidated under this Act and any organization which is joined before the enforcement of the Act. It infers to all the insurance companies aside from one which is exempted under the Insurance Act, 1938. It additionally infers to all the banking companies aside from one’s exempted under the Banking Regulation Act, 1949. It additionally infers to every one of the companies which are occupied with generation or supply of electricity aside from the ones that are conflicting for its provision under Electricity Act, 2003.

Meaning and Concept of Company under Companies Act, 2013

There are numerous meanings of a Company by different legal experts. Section 2(20) of the Act, characterizes the term ‘Company’ as pursues: “Company means a company incorporated under this Act or any previous company law.”

“Company” in the normal use alludes to a willful association of people framed to accomplish a typical social or financial end. In common law, a company is a juristic character or lawful individual separate from its individuals. In this way, it exists just in the consideration of the law.

At the end of the day, a company is an artificial lawful individual made and contrived by the laws for an assortment of purposes, for example, the advancement of charity, religion, trade or business. The company, much the same as a natural individual has most of the similar rights and owes similar duties, yet has neither a brain nor its very own body. 

Characteristics of a Company

To comprehend the significance of a Company, it is essential to take a gander at the distinctive features that clarify the domain of a Company.

Incorporated Association:

A company comes into existence when it gets itself registered with the registrar of companies. The company for this purpose has to submit certain documents with the registrar who registers such documents and give it a certification. The Company has to fulfill all the legal requirements before it can be registered.

A Company is a Separate Legal Entity:

One of the most particular features of a Company, which makes it unique from other organizations, is that it gets a novel character of being a separate legal entity. Consequently, when you register an organization, you give it a legitimate character with similar rights and powers as a human.

The presence of an organization is different and separate from that of its members. It can possess property, financial balances, raise credits, cause liabilities and enter into contracts. As indicated by the Law, it is completely different from the subscribers to the Memorandum of Association.

Likewise, it has a distinct personality which is not quite the same as the individuals who create it. Members can likewise contract with the Company and gain a right against it or create a liability to it. Be that as it may, for any debts, the creditors can sue the Company yet the members can’t.

A Company can possess, enjoy, and discard a property in its very own name. While the investors add to the capital and assets, the organization is the legitimate proprietor of such assets and capital. Further, the investors are not private or joint holders of the organization’s property.

This characteristic further laid to the development of the doctrine of corporate veil. The doctrine states that a company is to be considered as a separate person and all its acts are to be considered as the company’s act and not the act of any of its officer. The doctrine was laid down in the case of Salomon v. A. Salomon & Co. Ltd.[1]. In this case, the court observed that a company properly incorporated is a separate entity from its member and the corporate veil must not be lifted in all the cases.

Perpetual Succession:

Another significant element of a Company is that it keeps on carrying on its business despite the death of its members until it is wound up on the grounds determined by the Act. Further, the shares of the organization change hands interminably, however that does not influence the existence of the company.

In straightforward words, the organization is an artificial person which is brought into existence by the law. Thus, it very well may be ended by the law alone and is unaffected by the death or indebtedness of its members.

Transferability of shares:

Section 56 of the Act, explicitly gives that the shares or other securities of any part in a company will be movable property, transferable in the way given by the Articles of Association of the company. Accordingly, the individual from a company can discard his offer by selling them in the open market and get back the sum so contributed. The transferability of shares has two main points of interest, to be specific it gives liquidity to financial specialists and simultaneously guarantees the security of the company. The transfer of shares of a company does not at all influence its reality or the executives and the investor can advantageously get assuaged of his risk by transferring his shares to some other individual.

Corporate Finances:

The shares of a company being transferable, it can bring maximum capital up in the least conceivable time. Apart from that, a properly incorporated company has the benefit of raising its capital by public subscription either by method for shares or debentures. A registered company can raise capital by securing a loan from the public financial institutions.

Limited Liability:

One of the significant highlights of an organization is the restricted obligation of its members. The obligation of a member relies upon the kind of organization.

On account of a limited liability company, the obligations of the organization in totality don’t turn into the obligations of its investors. In such a case, the risk of its individuals is constrained to the degree of the nominal value of shares held by them. The investors can’t be approached to pay more than the unpaid value of their shares.

On account of an organization limited by guarantee, individuals are at risk just to the degree of the sum guaranteed by them. Further, this liability emerges just when the organization goes into liquidation.

But in case of an unlimited company, the liability of the members of such a company is also unlimited. But, such cases are extremely uncommon.

Artificial Legal Person:

Another of the highlights of an organization is that it is known as an Artificial Legal Person because its creation is by way of a procedure other than the natural birth. Legitimate because its creation is by the law, and individual because it has similar rights to a person.

Further, a company can own property, bank accounts, and does everything that a natural individual can do except go to jail, marry, take an oath, or practice a learned profession. Thus, it is a legal individual in its very own sense.

Since an organization is an artificial individual, it needs people to work. These people are Directors who can verify the organization’s formal acts either without anyone else or through the common seal of the organization. But a company is not a citizen as per the law and therefore does not have the rights which are entrusted to a citizen.

Centralized Management:

The investors have no immediate worry with the administration of the company. They work out, just a developmental control. In this manner, the administration of the company is by and large not the same as its proprietorship. Autonomous working of management staff pulls in skilled professional people to work for the company in an air of autonomy, therefore, empowering them to accomplish the most noteworthy focuses of generation. The administration of the company for the most part vests in the executives who choose the arrangement matters in the gatherings of the board of directors. With talented professional chiefs upheld by budgetary assets, organizations can create and carry on their business productively. To put it plainly, professional type of the executives of business disassociates the ‘proprietorship’ from the control of the business and advances productivity. Furthermore, it gives adaptability and self-sufficiency to business endeavours inside the structure of the company law.

Can sue and can be sued:

A company can sue another person and can be sued by another person for any civil wrong on its own name and the officer in default can also be sued also. A natural person has to represent the company in case of a criminal complaint filed by the company. The name of the company and the goodwill related to it can be protected by the company. In case any statement or material which defames the reputation of the company is made by anybody, the company can sue them for such an act.

Separate Property:

Incorporation helps the property of the company to be separately recognized from that of its individuals. The property is vested in the company as a body corporate, and the change in membership does not affect the title. In the matter relating to a company, it is a lawful individual who equipped for owning, Enjoying and disposing of property in its very own name. The company turns into the proprietor of its capital and assets. The investors are not the few or joint proprietors of the company’s property. In Bacha F. Guzdar v. CIT Bombay[2] it was held that the company is an individual where all its property is vested, and by which it is controlled, oversaw and discarded.

Common Seal:

While an organization is an artificial individual and works through the agency of people, it has an official signature. This is affixed by the officers and workers of the organization on all its documents. This official signature is the Common Seal.

Although, the Companies (Amendment) Act, 2015 has made the Common Seal optional, Section 9 of the Act does not have the expression ‘and a common seal’ in it. This gives an alternative method of approval for companies who don’t wish to have a typical seal.

As indicated by this amendment, on the off chance that an organization does not have a common seal, at that point the approval will be finished by:

  1. Two Directors or
  2. One Director and the Company Secretary (if the organization has delegated a Company Secretary).

Kinds of Company

Comprehensively there are two sorts of companies based on the number of individuals, a privately owned company, and a public company. In any case, other than this differentiation, there are different sorts of organization. These are characterized based on the liabilities of their investors. They are classified as per the following,

Companies Limited by Guarantee:

A few companies are limited by guarantee. This implies the individual’s consent to a sum that they will pay if there should arise an occurrence of liquidation, for example, a guaranteed sum. Such liability will arise just in case of winding up of the company.

Unlimited Liability Companies:

Here the individuals from the organization are are liable for the losses of the organization. So if there should arise an occurrence of liquidation, the assets of the organization are insufficient to cover its liability, at that point the individuals need to pay the parity. Even their private property can be joined. Such sorts of organizations are not found in India.

Companies Limited by Shares:

Here the liability of individuals is limited by the nominal value of their shares. So on the off chance that the shares possessed by him are completely paid up, at that point he has zero liability. On the other hand, if the shares are not completely paid up, he can be called to pay up the balance sum if there is occurrence of liquidation of the company.

Limited Company

Ltd. implies or alludes to Public Limited organization. Public Limited organization is generally called limited liability organization and has been introduced late in the market. Public Limited organization is a fine blend of association company and business partnership and ensures progressive adaptability by adding the benefits of the two sorts of business components. It is thoroughly subject to the speculator to make the organization direct or a befuddled one. The accessories connected with the limited organization have either limited commitment or sometimes unlimited risk. Duty laws resemble the association firm. The genuine favored point of view of the limited organization is that the game plan is altogether versatile and thus, it tends to be made to keep up a few sorts of organizations. The basic and the fundamental part of a limited organization is the comprehension between the people and should be done with wonderful consideration. 

A Public Limited Company under the Act is an organization that has limited liability and offers shares to the overall population. Its stock can be obtained by anybody, either privately through  Initial Public Offering (hereinafter referred as ‘IPO’) or through trade on the stock market. A Public Limited Company is carefully directed and is required to distribute its actual monetary well being to its shareholders. A Public Company is an organization that has the authorization to issue registered securities to the overall population through an IPO and it is registered on at least one stock exchange board. A public company isn’t approved to start its business tasks just upon attaining a certificate of incorporation. To be qualified to keep running as a public organization, it ought to acquire another document called a trading certificate.

Private Limited Company

The private limited organization is an alternate legal substance and contains shareholders who have limited liability. Besides, the shares of the organization can never be offered to the general public. The word limited liability suggests that the shareholders’ liability is simply limited to the sum at first contributed. The first investment incorporates the shares’ ostensible esteem and the premium paid at the period of issuance of shares. The individual assets of the shareholders and executives are overall secured and can’t be taken remembering the true objective to satisfy the organization’s commitments. The private limited organization continues working in the market paying little heed to any alterations in the staff, possession or everything considered work of the organization. The organization will use its name for every legal issue and not the names of the boss or owners in any case. It is the organization which takes legal activities and enters in some genuine contract.

A private limited organization is a business entity that is held by private proprietors. This sort of entity constrains the proprietor’s liability to their ownership stake and confines shareholders from publicly exchanging shares.

One Person Company

The Act has provided for a new type of company known as One Person Company. In simple words, it is a company in which a single person owns all the shares of the company or can be termed as the owner of the company. The minimum number of person for the formation of such a company is one and the minimum number of director is also one. The person who is the sole natural person in the company must be a citizen of India and must be a major person. One Person Company is provided certain exemptions as well as restrictions. Such a company enjoys corporate status and the member(s) have limited liability.

Conclusion

A company is a group of individuals formed to carry forward certain legal transactions. The company is a legal person in the eyes of law and therefore enjoys similar rights and duties as a natural person. A company involves various characteristics such as perpetual succession until it is wound-up, the power to sue and be sued, right to own property on its own name etc. Further, there are different types of company which can be incorporated as per the choice of the promoters. A company can be limited by shares, limited by guarantee or unlimited company. Further in case of a company limited by shares it can be a private company or a public company. The Act brought a new type of company known as One Person Company.


[1]Salomon v. A. Salomon & Co. Ltd., AC 22 (1897).

[2]Bacha F. Guzdar v. CIT Bombay, AIR 740 (1955).

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