Company and its Types

A company is one of the most important and prominent forms of business organization. It can be described as a voluntary association of individuals, having a common purpose, who agree to pool their funds and unite to achieve the said goals. It can be called an artificial person created under the jurisdiction of law having a distinct legal personality and its signature, referred to as the common seal. It is essentially an artificial person in that it exists independently of the people who own, direct, and support its business. In legal terms, it is called an artificial person.

According to The Company’s Act, 2013, a “company” means a company incorporated under this act or under any previous company law [Section 2 (20)].

According to L.H. Haney, “Company is an artificial person created by law having separated entity with a perpetual succession and common seal”. 

Characteristics of a Company

1. Corporate Body: A company is a corporate body in the sense that it needs to be registered under the Companies Act, 2013 in order to be recognized as a company, otherwise it is just an unlawful association of people. Thus, incorporation with the vice Registrar of Companies and then registration under the law is mandatory for every organisation to be called a company.

2. Separate Legal Entity: A company is an artificial person whose existence is totally distinguishable from that of its shareholders and members. This means that the contracts entered into by the company shall in no way bind the members or the shareholders and vice versa. Furthermore, this feature allows the members to enter into contracts with the company itself and the right to sue and liability to be sued by the company as well.

3. Limited Liability: Since the existence of a company is distinct from that of its members, it means that the shareholders and members cannot be personally held responsible to pay the debts of the company. Their obligations are limited only to the extent of the amounts invested by them by way of purchase of various securities issued by the company or to the extent of the amount guaranteed by them. Any loan secured by the company is signed using the common seal of the company, making it the company’s obligation and not of its shareholders.

4. Transferability of Shares: The shares of a public company can be transferred freely among shareholders following the rules and regulations mentioned in the articles of association of the said company. This is,  however, not always the case for a private limited company. A private company may or may not allow the transfer of its shares among shareholders.

5. Common Seal: All the agreements made on the behalf of a company are signed using the common seal of the company. A common seal is a seal of approval of the said company and is unique for each such corporate body. The company gives its approval on decisions as an artificial legal person through this common seal.

6. Perpetual Succession: This is a very prominent feature of a company that distinguishes it from other forms of business organisation. Since a company is a separate legal entity, it means that it continues to function regardless of any fluctuations in its membership status, owing to retirement, termination, death, insolvency, or insanity of the members. In other words, members/ stakeholders may come and go, but the company keeps on functioning until the law calls for its dissolution or winding up.

7. Management and Control: The ultimate authority and control of the company remain in the hands of shareholders, who are large in number and moreover, scattered all over the world, which makes it almost impossible for them to be present at the Annual General Meetings of the company. This is why the shareholders elect the Board of Directors, who act as representatives of the former, voicing their opinions and making decisions and amendments on their behalf.

Types of Companies

1. Public Company

According to the Companies Act, 2013 a public company is one that invites the general public to subscribe to its share capital to raise funds. Applications are invited through the issue of prospectus and shares are allotment is made subsequently. Such companies allow their shareholders to transfer their shares easily without restrictions. The shares of a public company are listed on stock exchanges and all the trading is handled there with the help of brokers. Other characteristics of a public company include:

• The minimum number of members required to incorporate a public company is 7 and there is no limit on the maximum number of members.
• It has a minimum paid-up capital of 5 lakhs.
• Any private company, which is the subsidiary of a public company is also a public company.

Every public company shall use the suffix “Ltd.” in its name as per the Companies Act, 2013. 

2. Private Company

Contrary to a public company, a private company is one that does not offer its securities to the general public for subscription through stock exchanges, rather such trading is done either privately or over the counter. Such companies might also restrict the rights of their members when it comes to transferring shares. A private company can also transition to a public company subsequently at a point time in its lifetime. Going public would give a such company access to a number of other funding prospects as compared to a private corporate body. When a private corporation goes public, all the privately owned securities become public ownership and can now be listed on the stock exchange. Other characteristics of a private company include:

• The minimum number of members in a private company is 2 to the of maximum 200.
• It has a minimum paid capital of 1 lakh.
• Such a company does not invite the general public to subscribe to its deposits.

As per the Companies Act, 2013 every private company is required to use the suffix “Pvt. Ltd.” in its registered name. For example, ABC is a private company that is required to disclose that through the suffix ABC Pvt. Ltd.

3. One Person Company

As the name suggests, such a company only has one person as its member. In other words, a  One Person Company has only one shareholder as its member. Such companies are set up by entrepreneurs in the early stages of their business in order to avail the various perks OPCs offer as opposed to the sole proprietorship model of a business organisation. OPC has an edge over sole proprietorship in the sense that while an OPC is a separate legal entity from that of its member, implying that its assets and liabilities are separate/distinct from the latter; a sole proprietorship is not separate from that of its proprietor. This means that the proprietor is personally liable for the business debts, which is not the case in an OPC. Other characteristics of OPC are:

• Companies Act, 2013 defines an OPC as a private company with a single member.
• The sole member of the company has to announce a nominee at the time of registration of such OPC.
• OPC lacks the feature of perpetual succession as opposed to a joint stock company as the death, insanity, or insolvency of the sole member would leave the decision up to their nominee whether they want to continue the business or not.
• There is no amount of minimum paid-up capital prescribed for an OPC.
• An OPC must have one person as its director. The maximum number of directors can be 15 at one point of time.